1)
What is a franchise?
A franchise is a relationship (commercial as well as legal) between
the owner of a trademark or advertising symbol, and a party that
wishes to use the symbol in a business venture. Only after the
consent of the parent company has been given to sell the goods
and services which they control, may a franchisee begin business.
There are varying levels
of control over franchisees by their franchisors.
In many cases a franchisor will aid in the
entire planning, opening and early management
of a business. However, other franchisors may
simply give the franchisee consent to sell
their product and use their trademark, and
be less involved in the opening of the new
business within their company.
2)
What are the advantages of franchising
as opposed to opening an independent
business?
Franchising carries many positive aspects that independent business
ownership lacks. The franchisee is able to gain valuable business
knowledge and expertise from the franchisor that is not available
to those who start a business independently.
Along with business savvy,
the franchisor is also able to provide some
financial assistance to the franchisee, as
well as, in some cases, experienced employees
to help the business get on its feet. The stability
that is provided by the franchisor’s
experience, success and guidance is the most
appealing aspect of franchise ownership.
3)
What are the different types of
franchising?
There are three main types of business franchises-
Product/trade name Franchising- In this type of
franchising, a franchisee purchases the rights to a logo or name
from a franchisor.
Distributorships- In distributorships,
a parent company gives permission to a franchise to sell
and distribute their products.
Business Format Franchising- This is the
most “hands on” form of franchise. In this
case, the parents company is very involved with the start-up
and management of the franchisee’s business. Training,
finance and marketing assistance along with supply of product
are all aspects of business with which a franchisor will
help its franchisee in Business Format Franchising.
4)
What does a franchise agreement entail?
A franchise agreement is the most integral component of the relationship
between franchisor and franchisee. This document states the rights
and responsibilities of both parties. This document is usually
written up by the franchisor. It is the right of every prospective
franchisee to receive the franchise agreement at least five business
days prior to its signing.
This five days window
should allow the document to by reviewed by
the future franchisee as well as an attorney.
An ordinary franchise agreement will state
explicitly how involved (or uninvolved) a franchisor
will be in training, product supply, financial
aid, marketing, etc. No standard for franchise
agreements exist because there are simply too
many factors that go into the agreement that
vary in every situation.
5)
What is found in a disclosure statement?
A disclosure statement, or circular
offering, is a document that gives
the potential franchise owner a
complete overview of the
company’s financial and legal history. The first few pages
of the disclosure statement must include a listing of risk factors
that accompany the owning of the business such as: costs, the date
of the business offering, and what state laws control the pending
transaction.
This document must be
updated at least once per year, or whenever
any major changes within the company’s
infrastructure occur. An optional section of
the disclosure statement called an earnings
claim statement may include actual, and projected
costs and profits for a franchise owner. Although
the franchisor is not obligated to present
this document, it is rare that one is not included
with the disclosure statement.
6)
What if false, or incomplete information
is provided by the franchisor within
the disclosure statement?
There are laws governing the sale of businesses via any information
that may be misleading or incorrect. There is some ambiguity surrounding
what information could be construed as vital in the decision making
process of someone considering the purchase of a franchise.
This being said, legal
action against a franchisor by a potential
franchise owner, for omission of information
could be hard to justify. However, if information
is deliberately distorted or falsified, it
is well within one’s legal rights to
file suit against the franchisor.
7)
Is a franchise agreement negotiable, or is it strictly set by the franchisor?
In most cases, there are aspects of the agreement that can be worked
out between the two sides. It is totally the decision of the franchisor
what, if any parts of the franchise agreement may be negotiated.
Components such as trademarks and logos are generally never negotiable,
but smaller elements such as price, hours, etc. may be negotiated.
8) How do I go about buying
an existing franchise?
A disclosure statement is only required by the Federal Trade Commission
for the purchase of a new franchise. If an existing franchise is
being purchased, the current franchise owner is not responsible
to provide the buyer with the franchisor’s disclosure statement.
This being the case, care should be taken when making the decision
whether or not to buy the franchise.
Without a detailed report
of the franchisor’s history, it is easy
to be misled into an unwise purchase. The best
thing to do is to hire a lawyer to help you
carefully study the contract between the existing
franchise owner and the franchisor. This will
allow you to compile most of the details that
are contained within a typical disclosure statement.
9)
Is the franchisor able to decide
not to renew or completely end
my franchise agreement?
This will vary, depending on what is stated in your franchise agreement.
After the amount of time that the franchise agreement was signed
for, there is a period of negotiation between the franchisor and
franchisee to decide whether or not the agreement is extended.
At this time, the franchisor may terminate the contract for essentially
any reason they choose. If the franchisor would like to terminate
the agreement within the time period originally stated in the contract
they must have sufficient reason and evidence that the franchisee
was not meeting standards of the parent company.
10)
Should I own my own business before I decide
to buy a franchise business?
Although it may help you, owning your own business
before purchasing a franchise is not a necessity.
In fact, many franchisors may like
it if you hadn’t owned your own business prior to investing
in their company. This is simply because they may believe that
you have developed your own ways and habits, especially if your
prior business was in the same market as theirs, which are not
conducive to their business plans and operations. This being said,
the recognition of responsibility, work ethic, and general knowledge
are aspects of business what could prove helpful in your franchise
venture.
11) Do most people looking to start a franchise use financial assistance in doing so?
Only about ten percent of new franchisees attempt to get their
new business of the ground without any outside financial help.
Of these, a much smaller percentage are actually successful in
doing so. That leaves an overwhelming majority of franchisees that
depend on bank or other sources financing. Other than a traditional
bank loan there are other options to investigate with looking for
financing.
These alternative sources
include state programs, federal programs and
credit unions. There are many groups that also
offer programs designed specifically for minority
groups. Looking into assistance for funding
your new franchise is a worthwhile cause and
is something that is done by nearly all new
franchisees.
12)
What is a royalty?
In franchising, a royalty is a monthly fee that is paid by a franchisee
to a franchisor. These royalty payments contribute to the franchisor’s
ability to support the franchisees that have branched out from
it. Royalties may be compared somewhat to the property tax that
is paid on a house. The franchise fee is like the down payment,
and the royalties are much like the property taxes that are paid
monthly.
13) What is the royalty payment based on? How much will I have to pay each month?
There are three main types of royalty rates that are usually used
by franchisors to asses this fee. They are net sales, gross sales,
and flat rate fees. The most common is net sales. The franchisor
will normally take about five to eight percent of your monthly
net sales as a royalty fee. Around six to ten percent of a franchisee’s
gross sales are taken by the franchisor if this is the royalty
method used. This is because the gross sales will naturally be
higher than the net sales. The last method, flat rate, is when
a franchisor collects one set rate every month, no matter how much
money the franchisee makes that month. Although these are the most
common methods of royalty fee, a franchise may also develop its
own way of assessing this charge that is most conducive to the
company’s success.
14) What is a master franchise?
This is a strategy that a franchisor uses to help expand its business
model in new markets either domestically or internationally. These
specific franchises are most commonly used in service-based industries
in which many locations. The responsibilities of a master franchise
go far beyond that of any other franchisee. They are in charge
of selling, opening and training new locations in their region,
as well as oversee the ongoing operation of any new locations that
are opened in its vicinity.
15) What is the benefit of
a master franchise?
Master franchisees are able to earn a vast majority of the franchise
fees generated from franchise sales. Along with the franchise fees,
the master franchise is able to gain a percentage of the royalties
within the territory. Master franchises are given a great deal
of freedom, and with this comes a great deal of responsibility.
They may be expected to run
and operate numerous locations while they develop
and grow the master territory. Essentially, a
master franchisee is a mini-franchisor. Although
it is more work to own and operate a master franchise,
it will also generate more revenue for the owner.
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