Franchising is a method of distributing products and/or services. At least two levels are involved in a franchise system: (1) the franchisor, who lends his/her trademark or trade name and business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
If a business is successful, the owner may develop a second or third location and hire employees to handle the day-to-day operations. At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she may decide to “franchise” the store name and business system to an independent owner, known as a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee’s sales. The business is now a franchise chain.
According to the International Franchise Association (IFA), the industry is consistently growing. In 2016, the franchising industry grew by 1.7 percent to a total of 744,437 establishments in all domestic franchise systems (either owned by franchisors and franchisees).
In 2017, the establishments that are expected to grow most significantly include: personal services (2.3%), quick service restaurants (1.9%), table/full service restaurants (1.9%), retail products and services (1.7%) and business services (1.5%).
In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions franchisees may confront.
The major advantage of buying a business format franchise is that the “system,” the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.
Virtually every business form you can imagine. The IFA now lists more than 75 different categories of franchises to describe its membership.
The increasingly mobile American consumer has come to depend on and appreciate the consistent quality of franchised products and services. Today, no matter where they go, people expect and want the same quality, which is why consumers so often engage franchise chains. The ability to easily recognize a franchised store, restaurant or hotel from the outside guarantees there will be no surprises or disappointments on the inside. Quite simply, the public knows what to expect and likes it that way.
Among the points which IFA recommends considering are:
- The type of professional experience required in the franchise chain
- A complete understanding of the business itself
- The hours and personal commitment necessary to run the business
- Who the franchisor is, its track record, and the business experience of its officers and directors
- The success of other franchisees in the same system
- How much it’s going to cost to break into the franchise
- How much you’re going to pay for the continuing right to operate the business
- If there are any products or services you must buy from the franchisor as well as how and by whom they are supplied
- The terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years
- The financial condition of the franchisor and its system
A federal regulation requires franchisors to prepare an extensive disclosure document and to provide a copy to any prospective franchise purchaser before he or she moves forward with buying a franchise. The disclosure document typically used to comply with this rule is the Uniform Franchise Offering Circular (UFOC). The IFA recommends that both your attorney and your accountant review the UFOC and your franchise agreement before signing any formal documents.
Fourteen states require franchise companies to file or register their franchise chain offerings with a state agency: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. These states, plus Oregon, also have separate disclosure regulations similar to those of the Federal Trade Commission.
You should contact the companies directly, and “shop wisely.” This approach requires that you determine how much you can afford to invest and where to obtain financing. Careful investigation prior to buying a franchise also necessitates understanding the UFOC. You need to examine what the franchise relationship entails.
You should also research the companies’ current growth and its prospects for future growth. You should also seek advice from professionals and business people you respect. By “shopping wisely,” you can make an informed decision on whether or not you should move forward with buying a franchise.
When buying a franchise, investment requirements differ greatly. It all depends on the industry and the type of business. Total start-up costs can range from $20,000 or less to over $1,000,000, depending on the franchise selected and whether it is necessary to own or lease real estate to operate the business. More, the initial franchise fee for most franchisors is between $10,000 and $30,000. Seventy percent of franchisors charge an initial franchise fee of $40,000 or less. The average investment, excluding real estate costs, is typically between $350,000-$400,000.
No one can be 100 percent sure. Although the majority of franchisees are satisfied, successful business people, some do suffer financial losses. That’s why you must be particularly wary of any franchises that “guarantees” profit or certain success. If you hear a claim about a franchise chain that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of earnings claims, you must recognize that your success can come only through hard work. Success or failure ultimately depends on you.
In exchange for the security, training, and marketing power of the franchise trademark, you must be able and willing to give up some of your independence. If you are a person who likes to make most decisions on your own or to chart the course of your business alone, buying a franchise may not be right for you. As a franchise owner, you must comply with the various controls and procedures established by the franchisor. All successful businesses require dedication and hard work. You must be prepared to make that commitment.
Companies and franchises that belong to the IFA must meet certain membership requirements. They must have a satisfactory financial condition and comply with all applicable franchise laws. In addition, all members must agree to abide by the Code of Ethics. IFA members are kept abreast of every change in franchising laws. IFA provides continuing educational programs for franchises on how to conduct their businesses.
They receive the latest information about topics such as improving relationships with franchisees, use of technology, public relations, marketing, advertising, field operations, networking and things a company with an eye to the future must know and implement to compete in the marketplace. BELFOR Franchise Group is proud to be a member of the IFA.