What is franchising?

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that identification in a business. The franchise agreement governs the method for conducting business between the two parties.
Generally, a franchisee sells goods or services that are supplied by the franchisor or that meet the franchisor’s quality standards.

What are the types of franchisees?

In its simplest form, a franchisor owns the right to a name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. In the more complex form, known as business format franchising, a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including:

• Site selection
• Training
• Product supply
• Marketing plans
• Financing

What are some of the benefits and responsibilities of a franchise ownership?

There are a number of aspects to the franchising method that appeal to prospective business owners. For example, easy access to an established product and a proven method of operating a business reduces the many risks of opening a business. In fact, U.S. Small Business Administration and U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups. The franchisee purchases not only a trademark, but also the experience and expertise of the franchiser’s organization.
A franchise typically enables you, the investor or “franchisee,” to operate a business. By paying a franchise fee, which may cost several thousand dollars, you are given a format or system developed by the company (”franchisor”), the right to use the franchisor’s name for a limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an operating manual; and advise you on management, marketing, or personnel. Some franchisors offer ongoing support such as monthly newsletters, a toll free 800-telephone number for technical assistance, and periodic workshops or seminars.

What factors should I consider when selecting a franchise?

Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors including:

• Demand for the products or services
• Level of competition
• Your ability to operate a business
• The franchisor’s background, experience and brand name
• The level of support you will receive
• Expected growth opportunities

How can I be sure that I have the potential to become a successful franchisee?

Perhaps your most important step in evaluating a franchise opportunity is examining your own skills, abilities and experience. The ideal franchisee is a creative, outgoing person who is eager to succeed, but not so independent that he or she resents other people’s advice. You must be able to balance your entrepreneurial initiative with a willingness to comply with the business formulas used by the franchiser. Remember, a successful partnership between a franchisee and franchiser involves a mutual understanding of each other’s values and achievements.

Determine exactly what you want out of life and what you are willing to sacrifice to achieve your goals. Be honest, rigorous and specific. Ask yourself: Am I qualified for this field physically, by experience, by education, by learning capacity, and financially.

Understand the risks and sacrifices required. Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy and money by you and your family can lead to an exciting and profitable venture.

How can I make an informed decision about a franchisor?

The Federal Trade Commission (FTC) requires sellers of franchises to provide prospective investors with the information they need to make an informed investment decision. It also requires that all earnings claims be documented, that the information investors receive be complete and accurate and that investors have adequate time to consider and evaluate the disclosures before making any final purchase commitment. All required information is given to prospective investors in the form of a franchise disclosure document, which must be furnished at least 10 business days before any purchase may occur. This document includes 20 important items of information, such as:

• Names, addresses and telephone numbers of other franchisees.
• A fully audited financial statement of the seller.
• The cost required starting and maintaining the business.
• The responsibilities you and the seller will share once you buy a franchise.
• Litigation involving the company or its officers, if any.

Again, use your professional support to examine all of these issues. Some of the contract terms may be negotiable. Find out before you sign; otherwise, it will be too late.

What are the sources of information on franchise opportunities?

Before you invest in a franchise system, investigate the franchisor thoroughly. In addition to reading the company’s disclosure document and speaking with current and former franchisees, you should speak with the following:

• Lawyer and accountant
• Banks and other financial institutions
• Better Business Bureau
• Government departments
• Federal Trade Commission (FTC)