{"id":41696,"date":"2021-07-12T05:40:01","date_gmt":"2021-07-12T09:40:01","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=41696"},"modified":"2021-07-19T05:49:39","modified_gmt":"2021-07-19T09:49:39","slug":"business-format-franchise","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/business-format-franchise\/","title":{"rendered":"Business Format Franchise: What It Is and How It Works"},"content":{"rendered":"\n

What is a business format franchise? How did Ray Kroc innovate franchising to create huge success?<\/p>\n\n\n\n

In The E-Myth<\/a> Revisited<\/em>, Michael E. Gerber discusses Ray Kroc’s business format franchise, a template that\u2019s been widely adopted by other companies. He shares the key to McDonald’s success, and he offers insights into how you might succeed by doing what they do.<\/p>\n\n\n\n

Read more to learn about the business format franchise template.<\/p>\n\n\n\n\n\n\n\n

The Franchise Movement<\/h2>\n\n\n\n

The franchise movement, which provided a \u201cturn-key\u201d model for new businesses, has had a transformative effect on American small business comparable to that of the industrial revolution<\/a> and the rise of technology and computers. The franchise model brings organization to the disarray of many small businesses and a path for development and continuous growth.<\/p>\n\n\n\n

The movement began in 1952, when a milkshake machine salesman, Ray Kroc, visited a hamburger restaurant owned by two brothers named MacDonald <\/strong>in San Bernardino, Calif.<\/p>\n\n\n\n

At the restaurant, he found high school students producing identical burgers systematically and efficiently under the supervision of the owners.<\/p>\n\n\n\n

Kroc immediately saw that this process could be replicated to continually make money, and he persuaded the brothers to let him franchise it. A dozen years later, he bought them out and created what became the world\u2019s largest prepared food delivery system.<\/p>\n\n\n\n

McDonald\u2019s, a $40 billion-a-year business with more than 28,000 restaurants at the time this book was written, calls itself \u201cthe most successful small business in the world.\u201d It triggered the growth of franchised businesses in the U.S. to the point that, in 2000, there were 320,000 franchised businesses in 75 industries.<\/p>\n\n\n\n

Franchising wasn\u2019t a new idea \u2014 Kroc\u2019s innovation was his \u201cbusiness format franchise,\u201d<\/strong> a new business template that\u2019s been widely adopted by other companies. Under business format franchising, the franchisor teaches the business format (marketing, selling, inventory, finance, personnel procedures)<\/strong> to the franchisee. It was so successful that from 1971-87, less than 5 percent of franchises failed. In five years, 5 percent failed compared to the 80 percent failure rate for independently owned businesses.<\/p>\n\n\n\n

A New Business Model<\/h2>\n\n\n\n

Originally, franchised businesses were \u201ctrade name\u201d franchises in which the franchisor merely gave small businesses a license to use its name and sell its products<\/a>. In contrast, under a business format franchise, the franchisee gets not only the name but also a complete <\/strong>system<\/em><\/strong> for operating a business<\/strong>.<\/p>\n\n\n\n

In the case of a trade franchise, the value lies in the brand name it\u2019s licensing (for example, Mercedes), but with a business format franchise, the value comes from the process or business model (how it sells something, rather than what it sells). For Ray Kroc, the business \u2014 McDonald\u2019s \u2014 was the product, not hamburgers. <\/strong>Kroc sold franchisees a business that works. Here\u2019s how he did it.<\/p>\n\n\n\n

Franchisees who wanted to buy a successful business<\/a> were Kroc\u2019s customers. He sought to differentiate his franchises from others by making sure they worked better than any others did. Because small businesses failed so frequently, he had to create a model or format that would be nearly foolproof no matter who bought it.<\/p>\n\n\n\n

He created a franchise prototype similar to the assembly-line model for making a mass-production product like a car: it was based on systems rather than people and could be assembled easily, efficiently, and inexpensively with uniform parts. Together, the systems produced exactly what the customer wanted and expected every time.<\/p>\n\n\n\n

Kroc had tested every part of his prototype and standardized everything. For instance, he determined that:<\/p>\n\n\n\n