Starting your own business may not be as difficult as you think.

Franchising is an increasingly important part of the American business landscape. It already comprises about 5% of businesses in America and generates about 8% of all private sector jobs.

Data released by the U.S. Census Bureau in 2010, the first report drawn up by the Bureau that gathered information on franchises, says that franchises made up 10.5 percent of business across 295 industries in 2007. Franchises accounted for $1.3 trillion in revenue and $153.7 billion in payroll disbursed to 7.9 million workers.

Franchising offers grassroots entrepreneurs a chance to get into business for themselves. The franchising model combines a potent mix of capital, brand and initiative. On the other hand, the cost of getting into a franchise business has risen steeply in recent years.

The Concept of Micro-franchising

A new concept, which started in less-developed countries where it has helped to lift millions out of poverty, is microfranchising.

Micro-franchising is a business model that applies traditional franchising to very small businesses. It is a systemized approach to replicating micro-enterprises like drive-in coffee kiosks, mall products and services, food stands and just about any other type of business that sells low cost products or services, primarily in high traffic areas.

For a very small investment, entrepreneurs can now become micro-franchisees in proven businesses without having to make high upfront investments.

How The Franchising Model Works

Let’s define the core concepts of franchising that are at the heart of micro-franchising. A firm with an established product or service (the franchisor) enters into a contractual relationship with other businesses (the franchisees). Franchisees operate under the franchisor's trade name and guidance--in exchange for a fee. The contract defines franchisor and franchisee responsibilities.

Franchisor Responsibilities

The franchisor provides a business model and marketing strategy that specifies segments, products/services and brand positioning. The franchisor also provides advertising, marketing, training and support.

Franchisee Responsibilities

The franchisee is responsible for the local facility and management of daily operations. In microfranchising, the franchisee buys a kiosk or cart and generally rents a location in a mall or store. As this trend has spread, even department and grocery stores have started to rent shelf space out to micro-franchises.

Harmonized Efforts Create Success

When the franchising model is executed well, it yields a high degree of alignment between franchisor and franchisees.

Not only do franchisees have “skin in the game” because they have invested and own a share of the upside but royalty payments to the franchisor require the franchisee to generate profits above their break-even point. The result? This creates positive pressure to focus hard on being efficient and maximizing cash flow.

More on the Franchising Model

Please stay tuned for my second article in this franchising series, in which I wil discuss advantages of the franchise model and tips for successfully operating a franchise.

About the Author

As a partner with Ernst & Young, Mike developed, led and drove significant growth in a number of practices. Mike’s experience also includes work with middle market entrepreneurs in which he advised many small-medium clients in Silicon Valley on tax strategy and planning. Contact or learn more about Michael here.

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