Franchising 101: The Bare Essentials
Many people have a dream of being their own boss or owning their own business. Entrepreneurship is a potentially lucrative ambition, and with the number of brands offering franchising opportunities, it is achievable.
Franchises offer people a chance to enter an existing marketplace with a known product or service, removing many barriers to starting a business. A new franchise owner purchases the keys to a legitimate "turnkey" operation, but that does not mean there are no risks.
Franchises are notoriously expensive, and the terminology and agreements can confuse even the savviest businesspeople. Before investigating or investing in a franchise, you need to learn about the process and its risks.
Advantages of Buying a Franchise Over Starting a Business
When considering business ownership, many people dream of starting their own operation. A new business can have lower startup costs than a franchise, and it offers the owner complete creative control and independence. Unfortunately, with the advantage of autonomy comes an increased risk of failure. Also, a new startup will have difficulty securing financing and turning a profit.
A franchisee receives startup support, and because the brand is established, they have an easier time securing financing. Also, brands support franchisees through national, regional, and local advertising. Other areas of support and cost savings include:
- Proven products and service methods
- Research and development
- Collective purchasing power
- Ongoing training
- Association with other franchisees
That said, franchisees need to acknowledge the disadvantages or compromises to the business model. The most common concessions include:
- Smaller profit margins
- Higher operating costs
- Lack of independence and creative control
- Potential conflicts between franchisor and franchisee
Understanding the FDD and the Franchise Agreement
The success of a franchise often rests in the relationship between the franchisor and franchisee. A healthy and supportive relationship often lends itself to a lucrative endeavor. The relationship's health usually comes down to its foundation, which refers to contracts, specifically the franchise disclosure document and the franchise agreement.
The FDD outlines the franchise system, provides information about the franchisor and lists all necessary agreements for an informed franchisee decision. The franchise agreement is a part of the FDD.
The franchise agreement delves into specific details about the expected franchisor-franchisee relationship. The agreement will address specific issues, such as:
- Trademarks
- Products
- Territory
- Term of the franchise
- Rights and obligations of both parties
- Payments
- Grounds for termination or transfer
- Assistance, training, and advertising
Asking a Franchisor the Right Questions
Part of making an informed decision to invest in a franchise is asking the right questions. Now, the list of potential questions is many, so it is best to review the recommended questions listed at Franchise.org, the official site of the International Franchise Association. Some of the general questions the IFA recommends:
- What is the current success rate of existing franchises?
- What are the all-in costs for the franchise?
- Is the franchisor in compliance with FTC and state disclosure laws?
- Is there an advisory council?
- Is the franchisor willing to negotiate terms or finance any costs?
- Does the company compete with franchisees in the marketplace?
A franchise provides an opportunity for success in an existing market without all the risks of a new business venture. Still, before investing in a franchise, do your homework and know the obligations of the franchisor and the franchisee. Your success depends on understanding your role and receiving the support you expect.