HAVE FRANCHISING QUESTIONS?
WE HAVE THE ANSWERS
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HAVE FRANCHISING QUESTIONS?
WE HAVE THE ANSWERS
About Franchising - Help with Buying a Franchise
Buying a franchise can be an investment in your future. But as with any major decision, you should thoroughly research the franchise industry, the franchise model and the pros and cons of owning a franchise. That’s why the International Franchise Association has developed this resource full of tips and information to help you get started. Congratulations on taking the first step towards being in business for yourself, but not by yourself.
WHAT IS A FRANCHISE?
Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the license to other party for the conducting of a business under their Trade marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), and provide other part an operating system, brand and support.
Business Format Franchising
Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the license to other party for the conducting of a business under their Trade marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), and provide other part an operating system, brand and support.
More than 120 diverse industries use franchising as their route to market including:
- Automotive
- Education
- Home-based
- Beverages
- Food
- Children’s Services
- Home Services
- Travel and Tourism
- Senior Care and Medical Services
- Cleaning, Maid, and Janitorial
- Retail Products and Services
WHAT ARE COMMON FRANCHISE TERMS?
COMMON FRANCHISE TERMS
Advertising Fee: Many franchise opportunities re-quire franchisees to pay a monthly fee into an Advertising or Marketing Fund. The fee is generally represented as a percentage (for example, two percent) and is almost always calculated on the franchisee’s gross sales, as opposed to net sales or profits. The Advertising Fee may also be a flat fee. The Advertising Fee is ongoing and will be collected throughout the period of time the franchise agreement is in effect. Advertising Fund monies are used to advertise the franchise brand, its products and/or service.
Ad Fund: Franchisees pay their Advertising Fees into an Ad Fund, which is used to underwrite the cost of advertising and promotions for franchisees.
Business format franchise: This type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals.
Disclosure statement: Also known as the FDD, or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system.
FDD: The Franchise Disclosure Document, FDD, is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee.
Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchise agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.
Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.
Franchise: The person or company that grants the franchisee the right to do business under their trademark or trade name.
Product distribution franchisee: A franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.
Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.
Trademark: The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Franchise Associations: There are approximately 40 trade associations throughout the world that represent the interests of franchisors and franchisees. See Inter-National Franchise Association.
Franchise Fee: A one-time, upfront fee required by the franchisor.
Franchise Expo: Franchise companies come together under one roof to exhibit their franchise opportunities for a day or more. The public is invited to these events. Expos sometimes include educational programs
Royalty Fee: A payment of money by the franchisee to the franchisor. Usually represented as a percentage (as an example, six percent) and paid weekly or monthly. May also be a flat weekly or monthly fee. Royalties are almost always paid on the franchisee’s gross sales, as opposed to net sales or profits. This is an ongoing fee that must be paid during the period of time the franchise agreement/license is in effect.
What are the advantages and disadvantages of owning a FRANCHISE?
ADVANATGES:
Owning a franchise allows you to go into business for yourself, but not by yourself.” A franchise provides franchisees (an individual owner/operator) with a certain level of independence where they can operate their business. A franchise provides an established product or service which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily takes years to establish. A franchise increases your chances of business success because you are associating with proven products and methods. Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement.
Franchises offer important pre-opening support: site selection, design, construction, financing, training, and a grand-opening program
Franchises offer ongoing support: training national and regional advertising operating procedures, operational assistance, ongoing supervision and management support, increased spending power, and access to bulk purchasing
DISADVANATGES:
The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchise agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee. In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees. Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business. A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem. The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.
What are the Legal issues of FRANCHISING?
A good relationship between the franchisor and franchisee is critical for the success of both parties. Since franchising establishes a business relationship for years, the foundation must be carefully built by having a clear understanding of the franchise program. Unfortunately, understanding the legal language of franchising can be daunting. The advice of an experienced franchise attorney should be sought to help a prospective franchisee understand the legal issues and to protect them from making costly mistakes. Franchising is governed by federal and state laws that require franchisors to provide prospective franchisees with information that describes the franchisor-franchisee relationship. The two main franchising legal documents are:
THE DISCLOSURE DOCUMENT ( also known as the FDD ) The purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. In addition to the disclosure part of the document, the FDD includes the actual franchise agreement as well as other agreements the franchisee will be required to sign, along with the franchisor’s financial statements. The FDD is designed to give you some of the information you need in order to make an informed decision about investing in a particular franchise. By law, a franchisor cannot sell a franchise until the franchisor has presented the prospective franchisee with a Disclosure Document. In fact, 14 states require franchisors to register their FDDs with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity in the state. The FDD includes information about:
- the franchisor
- territory rights
- the company’s key staff
- franchisor’s bankruptcy and litigation history
- initial and ongoing fees involved in opening and running the franchise
- other franchisees in the system with contact information
- management’s experience in franchise management
- required investment and purchases
- responsibilities of the franchisor and franchisee
Receipt of the FDD is governed by the “14-day rule.” This is a cooling-off period in which franchisors must give prospective franchisees 14 days to think about their decision before they are allowed to sign the franchise agreement.
THE FRANCHISE AGREEMENT The franchise agreement is more specific than the FDD about the terms of the relationship between the franchisor and franchisee. The franchise agreement includes information about:
- the franchise system, such as use of trademarks and products
- rights and obligations of the parties: standards, procedures
- payments made by the franchisee to the franchisor
- Training, assistance, and advertising
- territory
- term (duration) of the franchise
- termination and/or the right to transfer the franchise
The franchise agreement is the legal, written document that governs the relationship and specifies the terms of the franchise purchase. A prospective franchisee should closely review the franchise agreement and consult with a professional advisor, like an attorney or an accountant, before making a final decision.
What are your options when you begin your business? Once you make the decision to start your own business, you need to decide whether you want to be an independent business owner or a franchisee. STARTING A NEW BUSINESS:
ADVANATGES:
- usually lower start-up cost
- independence and creative freedom
- no inherited problems from an existing business
DISADVANATGES:
- requires more time and energy
- higher risk of failure
- takes longer to become profitable
- financing may be more difficult to obtain
BUYING A NEW FRANCHISE:
ADVANATGES:
- reduced risk of failure over an independent business
- proven methods and products
- start-up assistance
- on-going training and support
- local, regional, and national advertising
- collective purchasing power
- research and development
- association and synergy with other franchisees
- easier to obtain financing
DISADVANATGES:
- costs more (fees royalties, supplies)
- smaller profit margins
- lack of independence and freedom
- difficult to achieve redress if franchisor fails to meet obligations
- a franchisor’s problem may become your problem
BUYING A NEW FRANCHISE:
ADVANATGES:
- The business is already up and running
- risk and uncertainty are reduced
- the basic infrastructure is in place:
- established location
- existing customers and reputation
- employees
- vendors
- cash flow
- policies and procedures
- no start-up period-quicker profitability
- easier to obtain financing
DISADVANATGES:
- tangible limitations:
- design problems
- location problems
- merchandise problems
- intangible limitations:
- customer or employee ill will
- inadequate procedures
- pricing problems
- lease problems
- potentially higher costs to buy
- legal liability in inheriting lawsuits
How do you investigate your options?
Regardless of whether you choose to remain an independent business owner or become a franchisee, research is the single most important activity in making your decision. Without adequate information, you may end up making the most costly decision of your life.
STEPS FOR BEGINNING A FRANCHISE you must know:
- The business is already up and running
- Can you afford it? (Money to invest)
- Is there a market?
- Can you make good returns?
WHAT BUSINESS SHOULD YOU START?
Sometimes people start a business because they think they’ll make a lot of money, only to find out that they do not enjoy the business. The adage, “know thyself” certainly applies here. You should start a business in an industry that you will enjoy for the next 10 to 15 years.
Ask Yourself:
- What do you like to do? (interests and hobbies)
- What do you do well? (special skills and talents)
- What do you know how to do? (experience)
- What products or services could you sell in this industry(s)?
- Would you rather sell a product or service?
- What products or services would you like to sell the most?
- Which industry(s) involve your interests and use your skills and talents? (For ideas, refer to IFA’s Franchise Opportunities Guide’s listing of industries in the table of contents.)
“Find something you love to do and you’ll never have to work a day in your life.” -Harvey Mackay
DETERMINE IF THERE IS A MARKET
ALL SUCCESSFUL BUSINESSES MUST: Satisfy a need or Solve a problem or Respond to a trend, Before starting any business, determine if there is a market for your product or service.
Conducting market research:
- How many potential customers are in your area?
- What need does it satisfy?
- What trend or fad does it address?
- Who are your competitors?
- What do they offer?
- What marketing niche can you capture?
- Will your product or service sell?
- What problem does it solve?
- What should the appropriate oricing be?
- How many competitors do you have?
- How will your product or service be unique?
DETERMINE IF YOU CAN AFFORD TO START A BUSINESS
Make profit potential your most important consideration.
In order to start a business, you have to have money! In order to stay in business, you have to make money!
The single most common reason new businesses fail is that they did not have enough money to begin with!
Don’t forget the old business adage: “It takes twice as long and costs twice as much!”
Costs to consider
Estimate your start-up costs:
- location design and construction
- opening inventory and supplies
- opening advertising and promotion
- equipment and fixtures
- furniture
- pre-opening labor
- professional fees
- insurance
ESTIMATE HOW MUCH WORKING CAPITAL YOU WILL NEED (the money you will need until the business becomes profitable–include your living expenses, if necessary):
- salaries
- advertising
- insurance
- rent
- utilities
- interest on a loan, if applicable
Brainstorm where you might be able come up with money:
- yourself
- family
- friends
- loans
- a partner
- savings and investments
- selling personal assets
DETERMINE IF YOU CAN MAKE ENOUGH MONEY TO MAKE THE VENTURE WORTHWHILE
Estimate the profit potential for the business:
- income
- expenses
- profit (income – expenses)
Think about the amount of time and energy it will take to make the business successful. Make a decision as to whether you think you can make enough money to make the entire venture worth your.
What are the criteria for Selecting a Franchise?
Before buying any business, you must carefully consider many factors that are critical to your success:
COSTS YOUR ABILITIES
- How much money will this franchise cost before it becomes profitable?
- Can I afford to buy this franchise?
- How much money will this franchise cost before it becomes profitable?
- Can I make enough money to make the investment worth my time and energy?
- Do you have the technical skills or experience to manage the franchise?
- Do you have the business skills to manage the franchise?
DEMAND COMPETITION
- Is there enough demand in your area for the franchisor’s products or services?
- Is the demand year-long or seasonal?
- Will the demand grow in the future?
- Does the product or service generate repeat business?
- How much competition do you have, including other franchisees?
- Are the competing companies/franchises well established?
- Do they offer the same products and services at the same or lower prices?
- Is there a specialty or niche you can capture?
BRAND NAME TRAINING & SUPPORT
- How well known is the franchise name?
- Is the demand year-long or seasonal?
- Does it have a reputation for quality?
- Will the demand grow in the future?
- Have any consumers filed complaints with the local Better Business Bureau?
- What kind and how much training and support does the franchisor provide?
- Do existing franchisees find this level of training and support adequate?
FRANCHISORS EXPERIENCE EXPANSION PLANS
- Has the franchisor been in business long enough to have established the type of business strength you are seeking?
- Is the franchisor planning to grow at a rate that is sustainable?