FRANCHISE

In this site:

+ Background on franchising
+ What are the important features of franchises?
+ How to choose the best franchise for me?

Background on franchises and franchising
Dating back to the 1850's, franchising is simply a method of distributing products or services. At least two levels of people are involved in the franchise system: a. the franchiser, who lends his trademark, trade name and/or a business system; and b. the franchisee, who usually pays an initial investment and ongoing fees for the right to do business under the franchiser's name. The word 'franchise' technically refers to the actual business that the franchisee operates. Today, there are thousands of successful franchisers and millions of successful franchisees that provide products and services to consumers and businesses all around the world. This information was put together to provide you a basic understanding of how franchising works so that you can shop wisely for the franchise opportunity that's right for you.


What are the important features of franchises?
The basic advantage of franchising is that the franchisee gets to take advantage of a proven business system.

Training and Support
Nearly all franchise companies provide you with all the training and ongoing support you need to become and remain successful. They have a vested interest in you being able to run the franchise profitably and succeeding in your business. After all, the more profits your franchise makes, the more money the franchiser makes.

Brand Awareness
Without a franchise, it can take years for a business to successfully build a well-recognized brand that helps drive sales and provides a competitive advantage over other competitors. Brand awareness can make or break a business, and franchises can provide instant and proven brand awareness without having to create it yourself.

Purchasing Power
Most franchise companies have the ability to purchase their goods, products, and supplies at reduced rates because they buy in bulk. When buying into a franchise, you are able to take advantage of these bulk rates without having to build up any purchasing power yourself.

Proven Business Plan
Most of the thoughts, mistakes and successes of a business have been worked out and incorporated into a successful franchise. When buying into a franchise, you are 'going around' the mistakes that have been made in that industry, and are able to take advantage of the knowledge and skill of the franchiser company without having to learn yourself.

Advertising
In addition to providing an established brand name or business system, most franchise companies support their franchisees with local and national advertising and promotions to help drive sales. Of course, this advertising is paid by the initial investment and ongoing fees that you pay to the franchiser.
Disadvantages of franchising
In exchange for the security, training, and marketing power of the franchise trademark, you necessarily give up some of your business independence. The franchiser has an important interest in making sure that all franchisees operate within a certain set up guidelines and procedures. As a franchisee, you must comply with these various controls and procedures. At times, this could mean missed opportunity if the franchiser does not recognize the same opportunities and/or react to the market place in the same way you would.

Legal protection
There is a federal regulation that requires franchisers to prepare an extensive disclosure document and to give a copy to any prospective franchise purchaser before he or she buys a franchise. The disclosure document is called a Uniform Franchise Offering Circular, or UFOC. Within the UFOC are 23 different categories of information about the franchise, including required fees, basic investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchiser, earnings claims, etc. In addition, fourteen states require franchise companies to file or register their franchise offerings with a state agency: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Oregon, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.

How to choose the best franchise for me?
When considering a franchise opportunity, it is very important to consider overall industry growth, and it is equally important to consider an individual franchiser's operation and track record. A successful franchise in a declining industry, or an unsuccessful franchise in a growing industry may be cause for serious scrutiny as to the long-term potential for success. A newer franchise in a newer industry without a significant track record might also require more diligent investigation. Make sure to balance these two aspects of the franchise opportunity to a level that is consistent with your business goals and comfortable to you.

Just like in any business, it is possible to lose money when opening and managing a franchise. Be particularly wary of any franchiser that "guarantees" a profit or success. If you hear a claim about a company that sounds too good to be true, it probably is. Make sure to investigate all claims of earnings made by a franchiser. After all, franchisers are trying to 'sell' you on their service, so buyer beware.

When searching for a franchise that is right for you, it's best to find out the entire universe of franchise opportunities. Research online, buy books, subscribe to magazines, etc., until you feel like you've been exposed to virtually all of the types of franchises available. Once you have that pool of possibilities, it's time to start narrowing down the list by focusing on your budget, your specific expertise, and your area of interest. In addition, the IFA (International Franchise Association) recommends that prospective franchisees investigate the franchisers in the following areas:

1. the type of experience required in the franchised business;
2. a complete understanding of the business;
3. the hours and personal commitment necessary to run the business;
4. who the franchiser is, what its track record has been, and the business experience of its officers and directors;

5. how other franchisees in the same system are doing;
6. how much it's going to cost to get into the franchise. Investment requirements differ tremendously among franchisers. Total start-up costs can range from $20,000 or less, to over $1,000,000, depending on the franchise selected, and whether it is necessary to own or lease real estate to operate the business. The initial franchise fee for most franchisers is between $20,000 and $28,000 and according to recent figures, 88 percent of franchisers charge an initial franchise fee of $40,000 or less.
7. how much you're going to pay for the continuing right to operate the business;
8. if there are any products or services you must buy from the franchiser and how and by whom they are supplied;
9. the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years; and
10. the financial condition of the franchiser and its system.

Once you have identified a 'short list' of potential franchises, you should contact the companies directly for more information. Ask for a copy of their UFOC and make sure to understand it in its entirety. In addition, it is advisable to:

- Hire a lawyer and an accountant who understand franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws.
- Ask questions to understand all disclosures, franchise agreements, and other legal documents. Do not leave this up to your lawyer, as it is very important for you to have an intimate knowledge of this information.
- Verify everything a franchise sales person says by asking for it in writing. Remember that they are trying to sell you something, and it is your responsibility to verify what you are told.
- Analyze your market and make sure there is a need for your product both today and in the future. Research your competition as well as the prospective franchiser's growth and prospects for future growth.
- Contact both current and previous franchisees and ask them for both the positives and negatives associated with owning their specific franchise. Ask the franchiser for statistics relating to success and dropout rates.
- Make sure to understand what sort of investment is required and what sort of financing is available. Make sure that you are appropriately funded as a lack of investment capital could turn all of your early expenditures into a business loss.
- Understand what training and support is provided, whether or not you will receive any assistance in finding and developing a location,
- Get details as to what will be the source of your inventory and supplies, what requirements you have to purchase inventory from the franchiser, and what freedom or flexibility you have to purchase your own inventory.
- Meet the key management figures of each prospective franchise company, especially for smaller or newer franchise companies. Get to know both the company's executives and their representatives that you will be working with initially and on an ongoing basis.

Thank you for visiting our site. Please visit our sponsors for more information about specific franchise organizations and opportunities. For more background and useful information on related and other topics, please view our menu on the left.