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Questions About Owning a Franchise

What is franchising, and how does it work?

Franchising is when a buyer uses the successful template of an established business to build his or her own unit within a larger chain. By entering into a legal franchise agreement, the franchisee can offer products and services using the operating methods, trademark and trade name of its parent business, and enjoys support through training, advertising, and franchise development strategy in exchange for fees and royalties.

What are the different types of franchises?

Generally there are two different types of franchises: business format and product distribution. business franchises are the most common, and use not only the franchisor’s products, methods and trademark, but also a uniform format for franchise development, including business manuals, marketing plans and training guides. Examples of this type of franchise include McDonalds, Holiday Inn, Century 21 and Supercuts.

On the other hand, product distribution franchises sell the franchisor’s products, and work only within a supplier-dealer relationship. Product distribution franchisors license their logos and trademarks to franchisees, but do not offer a method for running the business. Examples of product distribution franchises are Coca-Cola and Exxon.

What are the different types of franchise arrangements?

Since there are a wide variety of industries and franchise formats available, there are different ways of approaching a franchise arrangement. A single-unit franchise is the most common arrangement, and occurs when the franchisor agrees to allow a franchisee to open only one franchise unit. From here, it is possible for a successful franchisee to buy more single-unit franchises, which then creates a multiple single-unit relationship.

A multi-unit franchise arrangement occurs when a franchisor allows a franchisee to open and run more than one unit of franchise. This occurs under an area development agreement where the franchise buyer can open more than one unit in a designated area within a specified time frame, or under a master franchise arrangement where the master franchisee not only has the rights to open units within an area, but can also sell sub-franchises to buyers within their territory, providing support and training in exchange for fees and royalties.

What are some of the advantages to owning a franchise?

As the owner of a new franchise, you have the security of marketing an established product with name brand recognition, which puts you a step ahead when it comes to building customer awareness and loyalty. Because of this association with a proven product, you have a greater chance of long-term success and also benefit from pre-opening and ongoing support from your chosen franchisor.

What are some of the drawbacks of franchise ownership?

By choosing to become a franchisee, you will not be a completely independent operator. You will be required to adhere to the rules outlined within the franchise agreement, and operate under restrictions such as the products or services you can offer, pricing and area. Because your identity is tied to a recognized brand name, any damage to the reputation of the parent company or other franchisees can also affect your business. Additionally, you will be required to pay royalties and advertising fees throughout the term of your agreement.

How can I get started in the purchase process?

To begin with, choose a business in an industry you will be happy to work within for the next 10 to 15 years, and then do your homework to determine whether there is a market for your franchise in your chosen area. Calculate your startup and operating costs and determine whether you will be able to earn enough money to make the investment of time, energy, and finances worthwhile.

Once you’ve decided to get your feet wet, it’s important to establish a strong business relationship between yourself and your franchise partner. To tackle the legal issues and language of franchising, it’s best to consult with a franchise lawyer well versed in state and federal laws, who can help guide you through the legal process and protect your investment.

What questions should I ask franchisors and their existing franchisees when investigating a business opportunity?

While doing research into your chosen franchise opportunity, it’s key to determine its history including how long it’s been in operation, its reputation on the market, how many other franchisees there are, and the failure rate for other franchisees. You will want to look into the company’s financial health, plans for expansion, and the background of management including past business experience, and whether there is a history of bankruptcies or recent lawsuits.
When speaking with other franchisees, determine the quality of support they receive from their parent company, the level of training they received, whether they have had any problems with the franchisor, and how they feel about the products or services they are providing.

What is a business plan, and why should I have one?

A business plan is simply a document describing your business, including what it does, its history, finances, customer base, competition, and long-term goals. A business plan is necessary to keep your business on track and direct its overall growth, as well as to show investors and franchisors your present status and long-term goals.

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