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Franchising is an increasingly important part of the American business landscape. It already comprises about 5 percent of businesses in America and generates about 8 percent 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 grass roots 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.

A new concept, which started in less developed countries where it has helped to lift millions out of poverty, is microfranchising. Microfranchising 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 microfranchisees in proven businesses without having to make high upfront investments.

How Franchising Works

Let’s define the core concepts of franchising that are at the heart of microfranchising. 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. 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. 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 microfranchises.

When the franchise 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.

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About Michael Evans

Michael Evans is Managing Director for the Newport Board Group, a partnership of board directors and senior executive leaders with deep knowledge of business strategy, operations, and capital markets. Previous to Newport, Michael L. Evans had been with Ernst & Young since 1977 and served as a partner since 1984. During his 34 years with the firm, he served as a tax, audit and consulting services partner, specializing in real estate companies and publicly traded entities. Michael served as the firm’s Global Director of the Real Estate and Construction Industry from 1988 to 1998, serving many of the largest international real estate organizations in the U.S. and the world. Michael is a frequent writer on business topics and has authored two books. He can be reached at (415) 990-1844 or via email at mievans@msn.com.

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