Franchise loans and their history

The Birth of Franchise Loans

Franchising did not take hold until after World War 2 but glimpses of it’s existence appeared back in the Middle Ages when landowners made franchise-ish agreements with tax collectors.

A druggist named John S. Pemberton made the first major success in franchising. In 1886, he created a beverage made up of sugar, spices, molasses, and cocaine. He licensed it to be bottled and sold as a drink, now commonly known as Coca-Cola. Other ingredients has since replaced cocaine.

Not all early franchisors were successful. Singer Company, who sold sewing machines, made too small margins from it’s franchisees. The company eventually bought out it’s contracts to regain control of it’s products.

As the United States shifted from an agricultural economy to an industrial economy, licensing and franchising became more and more common.

What is Franchising?

Franchising is when a business allows other businesses to use it’s business model and branding for a fee and a percentage of sales. This is a way to expand on a brand and make residual income off the success of the business. The franchisor depends on the success of it’s franchisees so it acts as a ‘cheerleader’ to improve everyone’s bottom line.

Fees and Contracts

There are typically three important payments to the franchisor: the royalty fee for the brand’s trademarks, the reimbursement for consultations and training from the franchisor to the franchisees, and a percentage of the gross sales. These are handled sometimes separately or all together as a management fee. There is also a one time franchise set up fee. Most lenders do not like the idea of including the franchise fee in the startup financing of the franchise. They consider that to be the ‘skin in the game.’

Trivia: About 44% of all businesses in the US are franchisee businesses.

Examples of Successful Franchises

Subway is the largest franchisor in the country. It has over 41,000 locations worldwide, 5,000 more than McDonald’s thanks, in part, to it’s low startup costs and smaller locations. Magilla Loans has introduced many franchisees to lenders to who focus on franchise lending to big brand companies.

Regions Outside the United States

If you are interested in owning a franchise outside of the United States, you should be aware that all countries have their own rules and laws in place. An experienced franchisee in the United States might assume the same rules apply everywhere since most franchisors are US based. This is not the case, and some franchises have adjusted their business model to fit the rules of each country.

It’s important to do due diligence when selecting a franchise and to find out the rules, fees, and costs associated. Many long-established franchises strongly recommend, even require, having a net worth of at least one million dollars. Not all franchises are created equal. The newer the franchise, the riskier the business model but typically it is easier to negotiate a better fee. Franchise loans might have had humble beginnings but they have grown into major factors in American small businesses. Franchises are a great avenue for many new business owners to get into.