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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