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About Franchising
Franchising
is a method of distributing goods or services to consumers. The franchising company owns the rights to the trademarks of a
business. The franchisee purchases the right to use the trademarks and operating system.
Most people associate
the word “franchise” with fast food restaurants. But, there are many more types of franchise businesses, including
everything from advertising to automobile repair, printing services to party supplies and many more.
Franchise
Types
Business Format Franchise
Product Distribution Franchise
History of Franchising
The word "franchise" comes from Old French meaning privilege or freedom. As economies evolved,
so did the concept of franchising. It is believed that our current concept of franchising comes from the mid 1800s when a
major German ale brewer granted certain taverns the exclusive right to sell their ale.
Around the turn of the
century, the face of franchising looked very much the same. This system essentially granted the right to distribute and sell
a product. At this time, the trend-setting model was the franchising rights concept authored by oil refineries and automobile
companies.
In the 1860s, the Singer Sewing Machine Company was the first to use franchising in the United States.
Singer developed written franchise contracts for the distribution of their sewing machines and was the first to implement
the predecessor of modern franchise agreements.
After WWII, millions of servicemen and women returned home, and
the Baby Boom began. The large work force demanded the opportunity to explore and develop more and better business opportunities,
which changed the business and our economy forever. With these demands, franchising evolved into the dominant and most successful
concept - business format franchising. In this type of franchising, the franchisor (example: McDonald's) not only allows the
franchise to use its name and sell its products or services, but also involves the total transfer of a way of doing business.
This includes marketing, operations, technical training, management techniques and expertise developed and perfected by the
franchisor. The franchisor will also provide on-going training and support throughout the life of the franchise agreement.
Future of Franchising
Within the next 10 years, franchising will continue its strong growth
trend. This growth should be anticipated based on the simple logic of the underlying concept. Franchising offers success to
aspiring, new business owners with the least amount of risk. These systems will enable hundreds of thousands of new business
owners to realize the dream of successful business ownership and financial independence.
Like the US and world
economies, franchising is evolving. There will be even greater opportunities for wealth creation among both franchisees and
franchisors as this evolution progresses. New franchises will be developed while the existing systems become more fortified
and continue to grow.
If you are ready to take the next step and go into business for yourself or if you have
an existing business that you want to optimize, then you should look closely at franchising as the vehicle to take you to
where you want to be in the 21st century.
Common Elements of a Franchise Agreement
Grant of Franchise
Term of Franchise*
Name of Franchise
Location of Franchise
Obligations of Franchisee
Initial franchise fee
Franchise service fees; reporting and audits
Advertising fund
Training assistance
Operation of the business format
Representations by franchisor
Representations by the franchisee
Relationships
of the parties
Renewal and renewal fee*
Assignment
Termination*
Procedures after termination
Remedies
for breach, and methods of enforcement, of the agreement*
Attorney fees
Amendment
Waiver
Approvals
Construction and venue
Severability
Binding to successors
Exclusive property
While there are
as many franchise agreements as franchisors, the above represents several common elements fundamental to most agreements.
The few that vary widely from franchisor to franchisor are identified with asterisks*.
Questions
to ask yourself
How much capital do you have to invest?
What is your net worth?
How much of
your net worth is liquid?
Do you require a specific level of annual income?
Are you interested in pursuing a particular
field?
Are you interested in retail sales or performing a service?
Do you want a part-time or fulltime opportunity
How many hours are you willing to work?
Do you want to be an Active or Passive owner?
Do you want a “brick
and mortar” business?
Do you want to have employees?
Do you want to have inventories?
Do you prefer a
cash business as opposed to one that must carry accounts receivable?
Will franchise ownership be your primary source
of income or will it supplement your current income?
Would you be happy operating the business for the next 20 years?
Would you like to own several outlets or only one?
Questions to ask a Franchisor
What assistance does the franchisor provide? Do they assist with training, store design, construction, site selection?
Do they have access to demographic data to get an understanding of the audience within the market area?
What types
of support will the franchisor provide once your franchise has opened its doors?
After the initial investment, will
there be additional financial obligations requiring working capital?
Does the franchisor offer any form of financing?
Ask the franchisor how many franchises have been sold in the state you will be operating in during the last 12 months,
and how many have been opened for business?
What types of territorial restrictions and protections have been set up
by the franchisor?
Is the franchisor planning on expanding within your state? Are they focusing on any specific locations?
What arrangements are established through the franchisor in terms of product supply?
Ask to see a current price
sheet.
Ask if the franchisor has been forced to terminate any of its franchisees and if so, can they detail the reasons
for this decision. Have any franchisees failed or gone bankrupt?
Are there any current lawsuits pending or past judgments
against the franchisor?
What steps are taken to settle disputes between the franchisor and franchisees?
Questions
to ask Franchisees
How long have you owned your franchise?
Is your franchise profitable?
In
which month did you reach your breakeven point?
Have you made approximately the same profit that was forecast in the
disclosure document?
Were your opening costs consistent with the original projections in the disclosure document?
Are you satisfied with the franchisor's support?
Are you satisfied with the product or service?
Is the operations
manual, clear, up-to-date and adequate?
Are you satisfied with the marketing and promotional assistance provided by the
franchisor?
Was the initial training and ongoing support sufficient for you to operate your business?
What was your
background prior to buying your franchise?
Are deliveries of goods provided by the franchisor timely and competitively
priced?
Is the franchisor fair and friendly to work with?
Does the franchisor listen and help you with your concerns?
Have any franchisees had disputes with the franchisor? What was their nature? Were they resolved fairly?
Do you know
of any disputes between the franchisor and the government?
Do you know of any disputes with competitors?
Who are
the major competitors?
What is the company's biggest competitive advantage? What is the company's biggest competitive
disadvantage?
Is Franchising right for you?
Can you follow somebody else’s rules,
even when you think you have a better way?
Do you think you can change the franchisor’s system after you are on
board?
Do you think that your local market is different from all others in the system and that the franchisor is willing
modify the system just to suit your needs?
Can you trust (with some honest skepticism) that your franchisor is working
for the benefit of the entire system – even when his or her decisions do not necessarily go your way?
Are you willing
to share financial information and provide required reports each month? Are you prepared to accept coaching and advice on
business practices from your franchisor’s field staff?
| What do I typically get when I become a Franchisee?
A Proven Business
Model
A Product or a Service to Offer
High Quality Customer Service System
A Method of Doing Business
Accounting
and Finance Systems
Forecasting Methods
Strategic Planning
Analysis of Market Trends
Marketing, Advertising
and Promotion
Sales Techniques
Product Research & Development
Quality Control Methods
Training in
Operations, Sales and Administration
Customer Relationship Building Tools
Pricing Strategies
Real Estate Assistance
Human Resource Methods
Construction and Design Assistance
Equipment Specifications
Legal Support
Steps to becoming a Franchisee
Analyze Your Personal Needs
Analyze Your Business Goals
Determine Type
of Business For You
Research Applicable Franchisees
Obtain Franchise Packet
Submit Request for Consideration
Forms, Financials, and Resume
Obtain and Review FDD
Speak in-depth with
Franchise
Interview Existing Franchisees
Second Interview with Franchise
Visit Franchise Headquarters
Consult
with Your Attorney & Accountant
Enter Into A Franchise Agreement
Obtain Real Estate
Initial Training
Complete Construction
In Store Training
Open For Business
On-Going Support
Advantages to buying
a Franchise
The business model has already been proven successful.
The franchisor utilizes collective buying
power and passes on the discounts to you.
Local and national advertising for the franchise operation as a whole is supplied
by the franchisor.
Supervision, training programs and consulting are readily available from the franchisor.
Managerial,
operational and accounting systems are in place to facilitate your success.
Franchisors insist that you are adequately
capitalized.
Ongoing research and development is provided by the franchisor.
Location! Location! Location!
Franchises
have a vested interest in your success..
In a franchise you are in a business for yourself, not by yourself.
Franchise Disclosure Document Explained
This document is for your protection and an
important tool when evalutaing a franchise. The Federal Trade Commission is the governing body that regulates franchises in
the United States. Each franchisor is required to answer 23 very specific questions in order to inform prospective buyers
about the business opportunity that they offer. The following are the elements of the FDD:
1. Description of the
franchisor, predecessors and affiliates
2. Identity and business experience of officers and directors
3. Litigation
history
4. Bankruptcy history
5. Initial franchise fee
6. Additional costs and fees
7. Initial investment
8. Restrictions on sources of products & services
9. Franchisee’s Obligations
10. Financing arrangements
for franchisees
11. Franchisor’s obligations
12. Territorial protection
13. Trademarks, service marks
and trade names
14. Patents, copyrights & proprietary information
15. Franchisee requirement to operate the
business
16. Restrictions on sale of goods and services
17. Renewal, termination, transfer and dispute resolution
of the franchise
18. Endorsements by public figures
19. Earnings claims
20. Names, addresses, and telephone
numbers of current and former franchisees
21. Financial statements
22. Contracts and agreements
23. Receipt
Exhibits or Addenda may include:
Franchise Agreement
Equipment Lease
Premise Lease
Loan Agreement
others
Common Franchise Terms
Acknowledgement Of Receipt: The last page of the FDD,
signed to indicate you received the documents on a certain date.
Advertising Fee: An annual fee paid by the franchisee
to the franchisor for corporate advertising expenditures; It is often less then three percent of the franchisee's annual sales
and typically paid in addition to the royalty fee.
Capital Required: The amount of cash you are required to have
available.
Earnings Claims: Representations made by franchise companies that their franchisees have achieved specific
levels of sales or profitability.
Exclusive Territory: The "territory" granted to you by a franchise
company, which restricts the franchisor from establishing any other location within your area.
Federal Trade Commission
(FTC): The federal agency in Washington, DC that regulates various trade practices including the franchise industry.
Franchise Agreement: An official document that sets forth the expectations and requirements of the franchisor. It describes
the franchisor's commitment to the franchisee, and includes information about territorial rights of the franchisee, location
requirements, training schedule, fees, general obligations of the franchisee, and general obligations of the franchisor.
Franchisee: The owner of one or more franchises.
Franchise Fee: The initial fee you pay to a franchisor
to acquire a franchise.
Franchising: Neither an industry nor a business, but a method of doing business within
a given industry. At least two parties are involved in franchising: the franchisor and the franchisee.
Franchisor:
The person or company that owns or controls the right to grant franchises for a specific "brand".
FTC
Rule 436: The law passed in 1979 that regulates the franchise industry. It set forth "disclosure" requirements and
prohibited franchisors from making undocumented earnings claims.
Initial Investment: Generally, the initial cash
investment required of you to buy and open a franchise. This can include the franchise fee and other initial start-up costs
and expenses you may incur, but may not be reflective of your total investment.
Liquid Capital: Also known as,
liquid assets, quick assets, and realizable assets. Assets held in cash or in something that can be readily turned into cash.
Net Worth: Total assets, once you've subtracted your total liabilities.
Non-Compete Clause: Upon termination,
non-renewal, or other sale or transfer, some franchise agreements prohibit you from competing in any way with the franchised
company.
Offer: An oral or written proposal to sell a franchise to a prospective franchisee upon understood general
terms and conditions.
Protected Territory: A designated area or geographic boundary granted to the franchisee by
the terms of a franchise agreement. The franchisor promises not to open another franchised or company-owned business of a
similar nature within the franchisee's protected territory.
Qualification Questionnaire: A document prepared by
the franchisor to be completed by the prospective franchisee, which provides initial information to the franchisor in order
to assist in determining whether or not the prospect is capable and motivated enough to own a franchise. Often a financial
statement is included in the questionnaire format.
Registration: A requirement in several states that specific
information be submitted and approved by state regulatory authorities before franchises may be offered in that state. It is
quite extensive in the information required and may ask for: a bond, fingerprints and pictures.
Start Up Costs:
The required amount of money the franchisor will request that a new franchisee have to invest in the new franchise unit in
its earliest stages of development.
Total Investment: The amount of money estimated for complete set up of a franchisee's
business, including the initial investment, the working capital, and any additions to inventory and equipment deemed necessary
for a fully operational and profitable business.
Franchise Disclosure Document: Provides background information
in over 20 categories as well as a copy of the proposed franchise agreement.
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