What is a franchise business? Let’s learn what being franchise means and how its system works in 5 minutes

Did you know that most convenience store orders were never employees of the company before starting the franchise? Originally, most did other jobs. Franchise businesses can be started even by inexperience people.

Here you will learn about the system of franchise businesses, the meaning of starting a franchise business, history and trends, what would it be like to start a business and so on. This information is covered for people who wants to start a franchise business or want to know more about it.


<Contents>

1. What is a franchise business?

  1-1. Comparison of business continuity rate, franchise business vs independent business

  1-2 .What is a royalty fee?

  1-3. Advantages of a franchise business

      1-3-1. You can take advantage of franchisee’s brand power.

      1-3-2. You will have continuous support to gather customers

      1-3-3. Even an inexperienced person can become an owner

      1-3-4. You can focus on your store’s management because the franchise does all of the  improvements of products and services

          1-4. Disadvantages of franchise business

      1-4-1. You need to pay royalty fee to the franchise

      1-4-2. You have to run your store as manual from the franchise says

      1-4-3. Being fragile to changes of outer environments

      1-4-4. Even after the end of period of contracts, sometimes you are restricted to start a store in the same industry

      1-4-5. Risks when significant brand defamation happened at another store from the same company

  1-5.What is the support from franchise?

2. History of modern situation of franchise business

  2-1. Beginning of franchise business

  2-2. Franchise businesses are around you.

  2-3. Current trends

3. Reality of franchise business

  3-1. Successful cases

  3-2. Failed examples

  3-3. Voices from owners

4. Summarize

   4-1. What kind of person fits in franchise business?

   4-2. Franchise business vary


1. What is a franchise business?

A franchise business is a business system where a franchise gives another person, the franchiser the rights to use it’s brand name, services and products in exchange for a royalty fee to the franchise.

Franchises always welcome new owners because they want stores that can make profits in short terms. By including all the elements, like stocking, selling, gathering customers, human resources, and product improvement are needed to successfully manage a franchise business. This support also allows a franchise business to be started by inexperienced business owners.  Usually each information needs special experiences, and information, but franchisers can get it at once because of franchise’s support.


1-1. Comparison of business continuity rate, franchise business vs independent business

Data has shown that regular companies have a 25% probability of lasting up to 5 years after being founded. Whereas, franchise companies have a probability of up to 70%. Franchise companies are almost three times more likely to last as long.. Also, it is easier to estimate the amount of sales compared to a non-franchise business, and it also helps a lot when borrowing funds from banks.

The meaning of starting a business by using the franchise system is the “high possibility of success”.

Instead of learning new information and knowledge, franchisers only have to pay royalty fee to the franchiser for information and knowledge instead of learning on their own.


1-2. What is a royalty fee?

The royalty fee in a franchise business is the money franchisees pay to the franchisers instead of getting knowledge from them. Most franchisers have a style of paying an amount depending on the sales amount. However there are some other options, for example, a monthly fixed royalty fee, or no royalty fee at all.

For example, in the convenience store industry, they calculate the royalty fee based on gross margin, that is the difference between the revenue and cost of goods sold. Its rate is also set on a gross margin.

You cannot forget about the initial funds, as well as the royalty fee(s) when you start a franchise business. Knowing what the initial funds are, and royalty fees allow you to know how much  money you will need to start.


1-3. Advantage of franchise business

 A franchise business is a business that you can start positively because there are many good examples. Still there are some advantages and disadvantages when starting a franchise business. Here is a summary of advantages and disadvantages.


1-3-1. You can take advantage of the franchise’s brand power.

Everyone most likely has some experience where they were attracted to a store because it felt familiar, causing a sense of security. This includes seeing long lines outside of a restaurant. Brand power has a huge impact on gathering customers. Sometimes you will see a long line of people right after a store opens, this is due to the brand’s power.

On the other hand, if it is an unknown restaurant, you cannot expect people to gather when the store first openings. You will need to increase customers gradually.



1-3-2. You will have continuous support to gather customers

Whatever business you do, gathering potential customers would be a common task. It is very important for small-scale businesses, especially for self –employment. However it is difficult to manage to raise money for advertising. However, you don’t have to worry about this, because the franchise will do almost all the advertisement for the entire store. The franchisers do big-scale advertisements by using TV, flyers and so on, so that member stores can gain customers and provide royalty fees to the franchise.


1-3-3. Even an inexperienced person can be an owner.

From selecting the location of your store to the actual management, all the management know-how is packaged in a franchise business. They provide manuals even for how to service customers. In addition, they send member stores a person in charge to train its methods for several days/months. After the opening, an employee from Franchiser Company who is called supervisor, give them some advices about management.

Franchise business has a big social-significance because it can help to realize people’s dreams that is to start a longing business even an inexperienced.


1-3-4. You can focus on your store’s management because the franchiser does improvements of products and services.

The franchise’s side has a role to improve products and to brush up manuals of services. The franchisee’s side can focus on management of store, human resource and education for employees.


1-4. Disadvantages of franchise business

1-4-1. You need to pay royalty fees to the franchise

During the period of your participation with the franchise, you have an obligation to pay royalty fees, even if your sales amount is not as much as you expected. Some franchises have deficit filling system.


1-4-2. You have to run your store as the manuals from the franchise says

Most franchise member stores cannot offer their own original services or promotions. You’re unfit for the franchise businesses if you want to run a store as you want.


1-4-3. Being fragile to changes of outer environments

Sometimes you cannot get a good sales amount because of changes of local population or the appearance of rival stores. In a regular business, you can deal with these changes by changing location of your store or business conditions. On the other hand you cannot do those changes during the franchise contract period.


1-4-4. Even after the end of period of contracts, sometimes you are restricted to start a store in a same industry

In most cases, it is prohibited to start a business in the same industry for several years after the end of franchise contract period. When you have a goal to have your own store, you need to read the contract seriously before joining the franchise.


1-4-5. Risks when significant brand defamation happened at another store from the same company

 Recently, there is no end of reputational risk that may begin with practical jokes made by part-time job workers who then spread it on SNS. If these accidents happen and the popularity of the franchise’s brand decreases, this affects all of the member stores.


1-5. What is the support from the franchise?

The roles of franchise is to create franchise packages, to continue improving them and to help member stores so that they can have a stable increase of sales. Franchises always do managements with their franchisees together by backing them up from the selection of  store locations. The quality of their supports show franchisers’ characteristics.

[Examples of support from the franchise]

Selecting proper store locations reflecting their experience.

Providing franchisees with the latest information in the industry.

Financial support (initial costs, deficit filling system etc.)

Education system of services, promotion and management

Training system

Regular supervisor visiting from the franchise headquarters

Improving qualities of products and services

Usually, the older the franchise company is, the more optimization of construction and support operations have been developed, so you can expect much stable support. Sometimes new franchise companies have a great support system when because they have veteran staff in their companies, or do horizontal expansion of their achievements as a brand.


2. History of modern franchise businesses

2-1. Beginning of franchise businesses

Franchise businesses are one of the oldest business systems. Franchise businesses were born in the 1850 in the United States of America. Its start was a sewing machine maker company who gave a retail store selling rights and collected a sales ratio. And then after than came “McDonald’s” and “Kentucky Fried Chicken”. These brands have improved their brand power by not only focusing on their products, but also focusing on business know-how, management methods, technical supports and training. Now that franchise marketing scale in the United States of America  is 5 times more than Japan. We can say that United States is a well-developed franchise business country.

  

2-2. Franchise businesses are around you.

Franchise business have more than 1300 companies, mainly convenience store chains. Its industries are varied, not only are they convenience store industry or fast food stores, but also cram school industries, massage service stores, and housekeeping services.


2-3. Tendency in these years

Franchise business marketing size has gradually grown and it is worth over US$200 billion. It has not only traditional companies, but also the number of new ones has been increasing. Recently even casino franchise business exists. In addition, the government supports people who want to start a new business, and the number of subsidy for it has been increasing from new too. Franchise business attracts people because it is easy to make income and an expenditure plan.

3. Reality of franchise business

To be independent by using franchise business means to join a franchiser. A relationship between the franchise and franchisee is also a relationship between business operators. To be the same as a regular business that is independent is impossible. Franchise businesses have successful cases, and failed cases. Here you will see both examples and the voices of people who joined some franchises.

3-1. Successful cases

We cannot define success in one meaning. Someone may want to be rich, to have a lot of time of his/her family, or develop the business’s scale by store expansion, and some of them realize these dreams in a franchise business. We call franchise’s that has big scale franchise business as “a mega franchisee”

[What is mega franchisee?]

A franchise that has multiple brands or many branches, especially who has more than 30 stores, or sells more than $17 billions in franchise businesses. The ways to be a mega franchisee vary, an existing company starting a franchise business as a new project, or you can start it as an self-employed business owner and make it an incorporated company and hire people for store managers and staff.

[Example of mega franchisees]

Kouichi Abe, CEO of E-holdings.

http://e-holdings.jp/company/

<Brief personal career>

He quit his former company after 11 years, and started a franchise business in the cram school industry. Now he operates cram school businesses, home care business offices, food distributing business offices, recycle businesses, and runs some restaurants overseas.

Tadashi Maruyama CEO of Marumichi Co.

http://www.031.co.jp/corporate.html

<Brief personal career>

He became self-employed as a franchise owner at the age of 22. Also he started other franchise stores in the food industry and the massage service industry. His company makes $13 billion a year.


3-2. Failed examples

Not everyone will succeed in franchise business. 30% of people who started franchise business fail. These are examples of failing in franchise business.

You had to continue your business even though it was in continuing deficit situation that was caused by appearance of rival store in the local area because you couldn’t cancel it during the contract period.

The brand power of your franchise declined a lot and it became very difficult to gather customers.

You couldn’t improve your management because of running out of funds and the number of customer of your store decreased.


3-3. Voices from owners

  Here is an interview of an owner of a franchise store, who got his wish. He was talking about his motivation for starting business and his life after that.

 [Mr. Suzuki who realized his dream to work with getting sufficient time to be with his family]


​​​​​​​Q.  Why did you started the business?

A.   When I started, it was right after of my second son’s birth, so I was eager to be with my family. I choose the remote business style that I could start with less money and do management. The biggest reason why I choose this style was to be able to use my time freely.


Q.  How is your life after you started?

A.  On weekend mornings, I often get up late, have breakfast and then play with my sons. Sometimes I go out with my wife to drink in the evening. Compared to former job, I think I can spend a much more fulfilled life were I can be with my family a lot. And I can  participate in my children’s schools’ events and so on.


[To realize your ideal work style, you need to prepare a lot.]

In the franchise business, there are many industries. Mr. Suzuki chosen his franchiser considering his ideal work and life style. To realize your work style in franchise business, you must know these things:

What kind of industry fits your characteristics?

Which chain company has stable ability to gather customers?

Which franchise company help you to realize your ideal work style?

etc.

You need to search each franchise carefully. When you consider joining a franchise, you should gather information by participating in orientation meetings and other job events that are held by each franchiser or on the Internet.


4. Summarize

You have learned many things about franchise businesses so far, from its construction to the meanings of being an independent business and the foundation and management.

The owner of your local convenience store has studied about these things a lot before he/she starts his/her store and made a great decision in his/her life. Next time you go there, you might see him/her with respectful eyes.


4-1. What kind of person fits in franchise business?

A franchise business management is a business method that has high chance of success but at the same time has risk of failure. These personalities fit in franchise business:

A person who can make gradual efforts along by franchiser’s manuals.

A person who can trust the franchise, and continue to have a good relationship with them in the long term

A person who can think by his/herself about improvement


4-2. Franchise business vary a lot.

If you have a clear goal, you should be completely independent and start a regular business. If you not, a franchise business can be a good choice for you to start a business. Types of franchise industries vary. Why don’t you search for your best franchise based on industries you are interested in, or initial funds.


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