|
Home
Franchise Education
Resource Assistance
Resource Links
Franchise Resales
Franchise Start-ups
Legal Resources
Business Structure
Books
Franchise Consultant
Business Opportunities
Franchise 500®
The Franchise Model
Entrepreneurial Radio
Financing
FAQ's
Contact Us |
FAQ's-Frequently Asked Questions About Franchising
Many people dream of being an entrepreneur. By purchasing a franchise,
you often can sell goods and services that have instant name recognition
and can obtain training and ongoing support to help you succeed!
1) 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. Although forms of franchising have been
in use since the Civil War, enormous growth has occurred more recently.
Industries that rely on franchised businesses to distribute their products
and services touch every aspect of life, from automobile sales and real
estate to fast foods and tax preparation.
In its simplest form, a franchiser 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.
Generally, a franchisee sells goods or services that are supplied by the
franchiser or that meet the franchiser's quality standards.
2) What are some of the Benefits and Responsibilities of 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. However, a franchise does not
ensure easy success. If you are not prepared for the total commitment of
time, energy and financial resources that any business requires, you
should stop and reconsider your decision to enter the franchise business.
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.
3) 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, such as the
demand for the products or services, likely competition, the franchisor's
background, and the level of support you will receive.
Demand
Is there a demand for the franchisor's products or services in your
community? Is the demand seasonal? For example, lawn and garden care or
swimming pool maintenance may be profitable only in the spring or summer.
Is there likely to be a continuing demand for the products or services in
the future? Is the demand likely to be temporary, such as selling a fad
food item? Does the product or service generate repeat business?
Competition
What is the level of competition, nationally and in your community? How
many franchised and company-owned outlets does the franchisor have in your
area? How many competing companies sell the same or similar products or
services? Are these competing companies well established, with wide name
recognition in your community? Do they offer the same goods and services
at the same or lower price?
Your Ability to Operate the Business
Sometimes, franchise systems fail. Will you be able to operate your outlet
even if the franchisor goes out of business? Will you need the
franchisor's ongoing training, advertising, or other assistance to
succeed? Will you have access to the same or other suppliers? Could you
conduct the business alone if you must lay off personnel to cut costs?
Name Recognition
A primary reason for purchasing a franchise is the right to associate with
the company's name. The more widely recognized the name, the more likely
it will draw customers who know its products or services. Therefore,
before purchasing a franchise, consider:
- The company's name and how widely recognized it is. -- If it has a
registered trademark.
- How long the franchisor has been in operation.
- If the company has a reputation for quality products or services.
- If consumers have filed complaints against the franchise with the
Better Business Bureau or a local consumer protection agency.
Training and Support Services
Another reason for purchasing a franchise is to obtain support from the
franchisor. What training and ongoing support does the franchisor provide?
How does their training compare with the training for typical workers in
the industry? Could you compete with others who have more formal training?
What backgrounds do the current franchise owners have? Do they have prior
technical backgrounds or special training that helps them succeed? Do you
have a similar background?
Franchisor's Experience
Many franchisors operate well-established companies with years of
experience both in selling goods or services and in managing a franchise
system. Some franchisors started by operating their own business. There is
no guarantee, however, that a successful entrepreneur can successfully
manage a franchise system.
Carefully consider how long the franchisor has managed a franchise system.
Do you feel comfortable with the franchisor's expertise? If franchisors
have little experience in managing a chain of franchises, their promises
of guidance, training, and other support may be unreliable.
Growth
A growing franchise system increases the franchisor's name recognition and
may enable you to attract customers. Growth alone does not ensure
successful franchisees; a company that grows too quickly may not be able
to support its franchisees with all the promised support services. Make
sure the franchisor has sufficient financial assets and staff to support
the franchisees.
4) How can I find a lawyer who specializes in franchising?
Entrepreneurs in search of a franchise lawyer can start by checking with
your state bar association. Many state bar associations allow member
lawyers to identify the areas of practice in which they specialize, and
franchise or distribution law is a recognized specialty in an increasing
number of states.
The American Bar Association also publishes a Membership Directory of the
Forum Committee on Franchising. The Directory, which is organized by state
and city, lists the names, addresses and telephone numbers of attorneys
who are members of the Forum Committee. You can obtain a copy of the
Directory from:
American Bar Association Service Center
750 North Lake Shore Dr.
Chicago, IL 60611
(312) 988-5522
5) What is the FDD -Franchise Disclosure Document?
The Federal Trade Commission (FTC) requires sellers of franchises and
other business opportunity ventures 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 14 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.
6) How Can I Evaluate My 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?
• Financially?
Ask yourself how this decision will affect your family. Do they understand
the risks and sacrifices required, and will they support your efforts?
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.
7) How Can I Prepare Prior to Shopping at a Franchise Exposition?
Attending a franchise exposition allows you to view and compare a variety
of franchise possibilities. Keep in mind that exhibitors at the exposition
primarily want to sell their franchise systems. Be cautious of
salespersons that are interested in selling a franchise that you are not
interested in.
Before you attend, research what type of franchise best suits your
investment limitations, experience, and goals. When you attend, comparison
shop for the opportunity that best suits your needs and ask questions.
Know How Much You Can Invest
An exhibitor may tell you how much you can afford to invest or that you
can't afford to pass up this opportunity. Before beginning to explore
investment options, consider the amount you feel comfortable investing and
the maximum amount you can afford.
Know What Type of Business is Right for You
An exhibitor may attempt to convince you that an opportunity is perfect
for you. Only you can make that determination. Consider the industry that
interests you before selecting a specific franchise system. Ask yourself
the following questions:
- Have you considered working in that industry before?
- Can you see yourself engaged in that line of work for the next
twenty years?
Do you have the necessary background or skills?
If the industry does not appeal to you or you are not suited to work in
that industry, do not allow an exhibitor to convince you otherwise. Spend
your time focusing on those industries that offer a more realistic
opportunity.
Comparison Shop
Visit several franchise exhibitors engaged in the type of industry that
appeals to you. Listen to the exhibitors' presentations and discussions
with other interested consumers. Get answers to the following questions:
- How long has the franchisor been in business?
- How many franchised outlets currently exist? Where are they located?
- How much is the initial franchise fee and any additional start-up
costs? Are there any continuing royalty payments? How much?
- What management, technical, and ongoing assistance does the
franchisor offer?
- What controls does the franchisor impose?
Exhibitors may offer you prizes, free samples, or free dinners if you
attend a promotional meeting later that day or over the next week to
discuss the franchise in greater detail. Do not feel compelled to attend.
Rather, consider these meetings as one way to acquire more information and
to ask additional questions. Be prepared to walk away from any promotion
if the franchise does not suit your needs.
Get Substantiation for Any Earnings Representations
Some franchisors may tell you how much you can earn if you invest in their
franchise system or how current franchisees in their system are
performing. Be careful. The FTC requires that franchisors that make such
claims provide you with written substantiation. Make sure you ask for and
obtain written substantiation for any income projections, or income or
profit claims. If the franchisor does not have the required
substantiation, or refuses to provide it to you, consider its claims to be
suspect.
Take Notes
It may be difficult to remember each franchise exhibit. Bring a pad and
pen to take notes. Get promotional literature that you can review. Take
the exhibitors' business cards so you can contact them later with any
additional questions.
Avoid High Pressure Sales Tactics
You may be told that the franchisor's offering is limited, that there is
only one territory left, or that this is a one-time reduced franchise
sales price. Do not feel pressured to make any commitment. Legitimate
franchisors expect you to comparison shop and to investigate their
offering. A good deal today should be available tomorrow.
Study the Franchisor's Offering
Do not sign any contract or make any payment until you have the
opportunity to investigate the franchisor's offering thoroughly. As will
be explained further in the next section, the FTC's Franchise Rule
requires the franchisor to provide you with a disclosure document
containing important information about the franchise system. Study the
disclosure document. Take time to speak with current and former
franchisees about their experiences. Because investing in a franchise can
entail a significant investment, you should have an attorney review the
disclosure document and franchise contract and have an accountant review
the company's financial disclosures.
8) Are There Additional Sources of Information?
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
Investing in a franchise is costly. An accountant can help you understand
the company's financial statements, develop a business plan, and assess
any earnings projections and the assumptions upon which they are based. An
accountant can help you pick a franchise system that is best suited to
your investment resources and your goals.
Franchise contracts are usually long and complex. A contract problem that
arises after you have signed the contract may be impossible or very
expensive to fix. A lawyer will help you to understand your obligations
under the contract, so you will not be surprised later. Choose a lawyer
who is experienced in franchise matters. It is best to rely upon your own
lawyer or accountant, rather than those of the franchisor.
Banks and Other Financial Institutions
These organizations may provide an unbiased view of the franchise
opportunity you are considering. Your banker should be able to get a Dun
and Bradstreet report or similar reports on the franchisor.
Better Business Bureau
Check with the local Better Business Bureau (BBB) in the cities where the
franchisor has its headquarters. Ask if any consumers have complained
about the company's products, services, or personnel.
Government Departments
Several states regulate the sale of franchises. Check with your state
Division of Securities or Office of Attorney General for more information
about your rights as a franchise owner in your state.
Federal Trade Commission (FTC)
The FTC publishes information that may be of interest to you, including
business guides - www.ftc.gov.
|
