Because of the risk and the amount of work involved in starting a business, many new and potential small business owners choose franchising as an alternative to starting a new, independent business. It is also true that the success rate for franchise-owned businesses is better than that of many independent businesses. So, if you are concerned about the risk involved in opening a new business then franchising may be the best option for you.
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 governs the method of conducting business between the two parties. Generally, a franchise sells goods/services supplied by the franchisor. The franchisor provides the business expertise in: marketing, management, financing, site location, and training that would otherwise not be available to the franchisee.
There are two types of franchises:
- Product/trade name: when a franchisor owns the right to the name or trademark and sells that right to a franchisee.
- Business format franchising: when a broader and ongoing relationship exists between the two parties and the franchisor provides a full-range of services, including site selection, training, product, marketing plans, and possibly financing.
Is Franchising For You?
As with starting any business, you must first assess your reasons for wanting to own and operate that business before investing your time, money, and energy. Purchasing a franchise, like any business, requires a huge commitment and if you’re not prepared to invest than you should stop and not move forward.
Evaluating Your Skills and Experience
Ask yourself why you want to purchase a franchise. List every reason. It isn’t unusual for reasons to range from the desire to be your own boss to the desire to be a millionaire. Whatever the reasons, be objective and honest. Reasons may include the following:
- Freedom from 9-5 routine
- Being own boss
- Doing what I want when I want to
- Improving my standard of living
- Have a product/service for which there is great demand
Next, conduct a self-analysis to determine if you have the personal skills and mind set needed to be a successful franchise owner.
- Are you a leader?
- Can you make your own decisions?
- Do others normally turn to you for help?
- Are you willing to comply with the provisions of the franchise?
- Do you have drive and self-discipline?
- Do you normally plan ahead?
- Is your family on-board with this process?
- Are you prepared to invest, and possibly lose your investment?
- Are you physically up to the task?
The following are some basic questions to determine your strengths and weaknesses.
- Do you know what basic skills are required to operate a successful franchise?
- Do you possess these skills?
- When hiring will you be able to select the right person for the right job?
- Have you ever functioned as a manager?
- Have you ever worked in a business similar to the franchise you want to purchase?
- Have you had any business training or higher level business education?
- Would you be willing to delay your plans if you discover you need to acquire more skills?
Many new small business owners choose franchising over starting a new business themselves because it provides easy access to an established product/service, reduces many of the risks involved in opening a new business, provides access to proven marketing methods, and in many instances provides assistance with start-up capital.
- Established product/service
- Technical & managerial assistance
- Quality control standards
- Less operating capital requirements
- Opportunities for growth – territorial franchise, right to sub-franchisees
- Service costs to franchisor
- Restrictions on freedom of ownership
- Termination of agreement
- Expansion of company with little risk
- Need only limited capital for growth
- Franchisees highly motivated
- Operate in non-union environment
- Bulk purchasing to reduce costs
- Cooperative advertising
- Company owned vs. franchised outlets, gets complicated
- Freedom to move quickly
Identifying The Franchisor’s Responsibilities
You must learn as much as you can about the franchise before entering into any discussion regarding an agreement.
Franchisors are obligated to:
- Provide you a copy of the Uniform Franchise Offering Circular at least 10 days before you sign the agreement.
- Provide you a copy of the franchise agreement and the franchisor’s financial statements. They cannot, under law, make any claims regarding the amount of money you will make. They must also detail all initial start-up costs.
- Provide a minimum of one week of training for you and one manager with operational manuals and provide ongoing support and assistance to all franchisees.
- Provide guidelines on audits and other procedures
- Provide full discloser on all initial fess and cost (royalties, promotional fees, etc.).
- Provide a marketing plan, area site selection, and promotional materials
- Provide adequate insurance coverage for franchises : fire, inventory, burglary, workmen’s comp, general liability, accident and health
- Provide a trademark that is known or will be known through advertising in the geographic area of use
- Provide guidelines on the purchase of inventory, equipment, and restrictions on goods sold
The Franchise Package
Your franchise package must include:
- A full detailing of the initial costs and what they cover
- Licensing fees
- Land purchase or lease
- Building construction or renovation
- Equipment & Training
- Training & Operating manuals
- Starting inventory
- Royalty payment
- Detail of interest on financing
- Restrictions on competition with other franchisees
- Terms of renewal rights and resale of franchise
Purchasing a franchise vs starting your own business has its good points and bad. You must decide if the franchise path is good for you. There are thousands of franchises in the marketplace for every type of business but you must be careful, perform due diligence, and make sure you have the mindset and management skills required to operate the franchise selected.
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