Franchising can be an easier way to start a business
- January 27, 2010
What if you sat down to write your business plan, but already had a successful brand in place? Becoming your own boss has its perks, but launching a business can be risky. Franchising can give potential business owners the best of both worlds — the ability to run their company without the trial and error inherent in building a business from the ground up.
Franchisees have the benefit of selling a well-known brand-name product. They have access to proven marketing strategies and business plans and easier access to financing than those who are starting their own businesses. Under agreements, franchisees pay for the right to market a product under the brand name of the franchisor. The franchisor provides training and advertising in exchange for fees.
Another major advantage is that starting a franchise requires much less capital than another business startup. Banks are also more likely to fund a franchise.
Franchising is also beneficial for the franchisor — it’s a good way for a company to grow its business without needing to provide the financing up front.
Franchises are not for everyone, however. Franchise agreements use restrictions that franchise owners may see as prohibitive. The agreements often specify pricing and geographical territories. Ongoing royalties and advertising fees must be paid by the franchisee. In addition, if another franchisee or the franchisor makes a mistake that tarnishes the brand name, your business can suffer.
Entrepreneurs should not consider starting a franchise if their primary goals are to become their own boss or nurture a new business idea. Franchises must answer to the franchisors, but franchises do tend to have higher success rates than other startup businesses.
As with any business, if you are interested in purchasing a franchise, make sure you do your research. Potential franchisees should use business news sources and franchising Web sites to investigate franchisors. Determine the number of franchises the franchisor has, the success rate of franchises, the company’s financial health and earnings projections, and whether the business has any pending lawsuits against it.
After narrowing potential franchisors down, another great source is the Uniform Franchising Offering Circular (UFOC.) Under federal law, franchisors must provide potential franchisees with a copy of the UFOC before they can offer to sell a franchise. This document will include information on the franchisor, its staff, management experience with franchises, fees associated with the franchise, territory rights and other franchises in the business with contact information.
The UFOC also includes the franchise agreement, which is the legal outline of the franchisor-franchisee relationship. Always use the advice of an experienced franchise attorney to help evaluate a company’s potential as a franchise and to review the franchise agreement.
Most franchise agreements include the following:
‣ Initial investment to operate the franchise
‣ Ongoing royalties paid to the franchisor
‣ Training the franchisor will provide
‣ Franchisee’s assigned geographical territory
‣ Brand name and trademark agreements
‣ Operating guidelines
‣ Cancellation and renewal terms
‣ Resale agreements
Under franchise agreements, franchisees pay the franchisor royalties for using their business plan and marketing features. Franchise agreements outline the legal relationship between the franchisor and the franchisee. The agreements will differ depending on the business, but most agreements outline the training franchisors will provide, the assigned territory of the franchisee and whether it is exclusive, the initial franchise investment fee, royalties the franchise must pay (typically 4 to 8 percent), operation guidelines and cancellation and renewal terms. Franchise agreements should always be reviewed by an attorney familiar with franchises.
Franchise Gator: http://www.franchisegator.com
International Franchise Organization: http://www.franchise.org
The Franchise Registry: http://www.franchiseregistry.com
FRANdata Corp.: http://www.frandata.com