Franchising is a unique business model. Its roots go back centuries, but within the restaurant industry, the first applications occurred in the 1920s, with A&W and White Castle being notable early adopters. During the next 30 years or so, they were joined by brands that later achieved icon status within the franchising world. Passage of the Lanham Act in 1946, which established protection of trademarks, is often credited as a catalyst for the adoption of the franchise model as a means for expanding distribution of goods and services.
Unlike brands that were born during later decades, the pioneers of restaurant franchising didn’t have the benefit of learning from the experience of others. By today’s standards, regulations were few, and the companies offering franchises drew up their franchise offerings and models on a relatively blank slate. The International Franchise Association (IFA) was founded in 1960 in part to bring best practices and self-regulation to the blossoming industry. The government stepped into the fray as well, and via the Federal Trade Commission (FTC), established the regulatory framework that governs so much of the world of franchising that we live in today. In 1979, the FTC implemented the Franchise Rule, which mandated that the franchisor pre-disclose certain facts to prospective franchisees. The Franchise Rule remained unchanged until 1993, when the Uniform Franchise Offering Circular (UFOC) was adopted. In 2007, the UFOC evolved into the Franchise Disclosure Document (FDD). Several states have adopted regulations that go beyond the federal requirements.
The benefits of franchising for both the franchisee and the franchisor are fairly obvious. The strongest evidence of the merits of the business format reside in the scale that has been achieved by brands that utilize the model. Due to the fact that it’s a “win-win” for the parties involved, it’s no surprise that franchising dominates the restaurant landscape, just like it has for many years.
Of course, like all things, that doesn’t mean investments in franchise businesses are without risk. But the risk doesn’t reside on only one side of the relationship. In order for a franchise brand to survive and thrive, both the franchisor and franchisee must have a fair chance for success and support one another.
So, what should a prospective franchisee look for in a franchise? Well, there’s no simple answer to this question. The maturity of the brand and franchisor is a critical factor, as new brands in the early stages of franchising sometimes possess a less robust track record. The franchisor will presumably present all of the information that is required of them by the FTC, which should include contact information for any existing franchisees that the prospective franchisee can connect with. Still, the franchise candidate may have only a fraction of the insights that might be available when considering an offering from a more established brand.
With all of that said, a new franchise brand might represent a ground-breaking opportunity with significant upside potential, but the lack of track record may make it an inherently riskier proposition. On the flip side, a well-established legacy brand may represent a lower-risk proposition. No matter which end of the spectrum a franchisee is considering, the key ingredient for a quality decision is the degree of due diligence they exercise.
Most franchise candidates face an important decision before signing on the dotted line. The gravity of the decision is unique to each individual or entity. It’s important for them to do their homework, as they’ll discover much about the historical performance of the brand and franchisor, and that knowledge will form a foundation upon which to build their assessment of the present state of the business. They will hopefully seek out other franchisees of the brand in order to assess the current state of affairs and other aspects of the business. Ultimately, they will then have to make their own assessment of the prospects for the future.
No one can predict the future with certainty, but ideally, both the franchisor and franchisee will make every reasonable and fair effort to produce a successful outcome. It is fair for the franchisor to expect that the franchisee will apply their best effort to the business. Likewise, the franchisee should harbor the same expectation. And while both parties have many common interests, it needs to be acknowledged that their respective businesses are unique to themselves. As mentioned previously, one cannot succeed without the other, but it should not be overlooked that what it takes for each to succeed is unique to their respective businesses. If neither party loses sight of that and makes it a priority to respect the other party’s point of view, the chances of success are endless.
There are many other considerations when a franchisee is deciding to invest in a franchise. However, underlying each of the considerations, are these basic elements, which should serve as the foundation for the development of a successful business.
Don Fox is Chief Executive Officer of Firehouse Subs, in which he leads the strategic growth of Firehouse Subs, one of the world’s leading restaurant brands. Under his leadership, the brand has grown to more than 1,200 restaurants in 45 states, Puerto Rico, Canada, and non-traditional locations. Don sits on various boards of influence in the business and non-profit communities, and is a respected speaker, commentator and published author. He was recognized by Nation’s Restaurant News as 2011’s Operator of the Year. In 2013, he received the prestigious Silver Plate Award from the International Food Manufacturers Association (IFMA).