FAQ

WHAT IS A FRANCHISE?

Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the license to other party for the conducting of a business under their Trade marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), and provide other part an operating system, brand and support.

Business Format Franchising

There are two different types of franchising relationships. Business Format Franchising is the type most identifiable to the average person. In a business format franchise relationship, the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business. The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor.

More than 120 diverse industries use franchising as their route to market including:

Automotive
Beverages
Business Services
Children's Services
Cleaning, Maid, and Janitorial
Education
Food
Health & Fitness
Home Services
Home-based
Retail Products and Services
Senior Care and Medical Services
Travel and Tourism

What are common franchise terms?

COMMON FRANCHISE TERMS

Advertising Fee: Many franchise opportunities re-quire franchisees to pay a monthly fee into an Advertising or Marketing Fund. The fee is generally represented as a percentage (for example, two percent) and is almost always calculated on the franchisee’s gross sales, as opposed to net sales or profits. The Advertising Fee may also be a flat fee. The Advertising Fee is ongoing and will be collected throughout the period of time the franchise agreement is in effect. Advertising Fund monies are used to advertise the franchise brand, its products and/or service.
Ad Fund: Franchisees pay their Advertising Fees into an Ad Fund, which is used to underwrite the cost of advertising and promotions for franchisees
Business format franchise: This type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals.
Disclosure statement: Also known as the FDD, or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system.
FDD: The Franchise Disclosure Document, FDD, is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee.
Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchise agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.
Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.
Franchisor: The person or company that grants the franchisee the right to do business under their trademark or trade name.
Product distribution franchisee: A franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.
Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.
Trademark: The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Franchise Associations: There are approximately 40 trade associations throughout the world that represent the interests of franchisors and franchisees. See Inter-National Franchise Association.
Franchise Fee: A one-time, upfront fee required by the franchisor.
Franchise Expo: Franchise companies come together under one roof to exhibit their franchise opportunities for a day or more. The public is invited to these events. Expos sometimes include educational programs
Royalty Fee: A payment of money by the franchisee to the franchisor. Usually represented as a percentage (as an example, six percent) and paid weekly or monthly. May also be a flat weekly or monthly fee. Royalties are almost always paid on the franchisee’s gross sales, as opposed to net sales or profits. This is an ongoing fee that must be paid during the period of time the franchise agreement/license is in effect.

What are the advantages and disadvantages of owning a FRANCHISE?

ADVANTAGES:

“Owning a franchise allows you to go into business for yourself, but not by yourself.” A franchise provides franchisees (an individual owner/operator) with a certain level of independence where they can operate their business. A franchise provides an established product or service which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily takes years to establish. A franchise increases your chances of business success because you are associating with proven products and methods. Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement.

Franchises offer important pre-opening support: site selection, design, construction, financing, training, and a grand-opening program

Franchises offer ongoing support: training national and regional advertising operating procedures, operational assistance, ongoing supervision and management support, increased spending power, and access to bulk purchasing

DISADVANTAGES:

The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchise agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee. In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees. Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business. A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem. The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.

What are the Legal issues of FRANCHISING?

A good relationship between the franchisor and franchisee is critical for the success of both parties. Since franchising establishes a business relationship for years, the foundation must be carefully built by having a clear understanding of the franchise program. Unfortunately, understanding the legal language of franchising can be daunting. The advice of an experienced franchise attorney should be sought to help a prospective franchisee understand the legal issues and to protect them from making costly mistakes. Franchising is governed by federal and state laws that require franchisors to provide prospective franchisees with information that describes the franchisor-franchisee relationship. The two main franchising legal documents are:

THE DISCLOSURE DOCUMENT (also known as the FDD) The purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. In addition to the disclosure part of the document, the FDD includes the actual franchise agreement as well as other agreements the franchisee will be required to sign, along with the franchisor’s financial statements. The FDD is designed to give you some of the information you need in order to make an informed decision about investing in a particular franchise. By law, a franchisor cannot sell a franchise until the franchisor has presented the prospective franchisee with a Disclosure Document. In fact, 14 states require franchisors to register their FDDs with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity in the state. The FDD includes information about:
- the franchisor
- the company’s key staff
- management’s experience in franchise management
- franchisor’s bankruptcy and litigation history
- initial and ongoing fees involved in opening and running the franchise
- required investment and purchases
- territory rights
- responsibilities of the franchisor and franchisee
- other franchisees in the system with contact information
Receipt of the FDD is governed by the “14-day rule.” This is a cooling-off period in which franchisors must give prospective franchisees 14 days to think about their decision before they are allowed to sign the franchise agreement.
THE FRANCHISE AGREEMENT The franchise agreement is more specific than the FDD about the terms of the relationship between the franchisor and franchisee. The franchise agreement includes information about:
- the franchise system, such as use of trademarks and products
- territory
- rights and obligations of the parties: standards, procedures
- term (duration) of the franchise
- payments made by the franchisee to the franchisor
- termination and/or the right to transfer the franchise
- Training, assistance, and advertising
The franchise agreement is the legal, written document that governs the relationship and specifies the terms of the franchise purchase. A prospective franchisee should closely review the franchise agreement and consult with a professional advisor, like an attorney or an accountant, before making a final decision.

What are your options when you begin your business?

Once you make the decision to start your own business, you need to decide whether you want to be an independent business owner or a franchisee. STARTING A NEW BUSINESS:

ADVANTAGES	DISADVANTAGES
usually lower start-up cost	requires more time and energy
independence and creative freedom	• higher risk of failure
no inherited problems from an existing business	takes longer to become profitable
	• financing may be more difficult to obtain

BUYING A NEW FRANCHISE:

ADVANTAGES	DISADVANTAGES
reduced risk of failure over an independent business	costs more (fees royalties, supplies)
proven methods and products	smaller profit margins
start-up assistance	lack of independence and freedom
on-going training and support	difficult to achieve redress if franchisor fails to meet obligations
local, regional, and national advertising	a franchisor's problem may become your problem
collective purchasing power
research and development
association and synergy with other franchisees
easier to obtain financing

BUYING AN EXISTING FRANCHISE:

ADVANTAGES	DISADVANTAGES
the business is already up and running	tangible limitations: design problems location problems merchandise problems
risk and uncertainty are reduced	intangible limitations: customer or employee ill will pricing problems inadequate procedures lease problems
the basic infrastructure is in place: established location existing customers and reputation employees vendors policies and procedures cash flow no start-up period-quicker profitability easier to obtain financing	potentially higher costs to buy
	legal liability in inheriting lawsuits

How do you investigate your options?

Regardless of whether you choose to remain an independent business owner or become a franchisee, research is the single most important activity in making your decision. Without adequate information, you may end up making the most costly decision of your life.

STEPS FOR BEGINNING A FRANCHISE you must know:

What Business activity suitable and viable?

Is there a market?

Can you afford it? (Money to invest)

Can you make good returns?

WHAT BUSINESS SHOULD YOU START?

Sometimes people start a business because they think they’ll make a lot of money, only to find out that they do not enjoy the business. The adage, “know thyself” certainly applies here. You should start a business in an industry that you will enjoy for the next 10 to 15 years.

Ask Yourself:

What do you like to do? (interests and hobbies)
What do you know how to do? (experience)
What do you do well? (special skills and talents)
Which industry(s) involve your interests and use your skills and talents? (For ideas, refer to IFA's Franchise Opportunities Guide's listing of industries in the table of contents.)
What products or services could you sell in this industry(s)?
Would you rather sell a product or service?
What products or services would you like to sell the most?

“Find something you love to do and you’ll never have to work a day in your life.” -Harvey Mackay DETERMINE IF THERE IS A MARKET

All Successful businesses must:

Satisfy a need or Solve a problem or Respond to a trend Before starting any business, determine if there is a market for your product or service. Conducting market research:

How many potential customers are in your area?
Will your product or service sell?
- What need does it satisfy?
- What problem does it solve?
- What trend or fad does it address?
What should the appropriate oricing be?
Who are your competitors?
How many competitors do you have?
What do they offer?
How will your product or service be unique?
What marketing niche can you capture?

DETERMINE IF YOU CAN AFFORD TO START A BUSINESS

Make profit potential your most important consideration. In order to start a business, you have to have money! In order to stay in business, you have to make money! The single most common reason new businesses fail is that they did not have enough money to begin with! Don’t forget the old business adage: “It takes twice as long and costs twice as much!”

Costs to consider:

Estimate your start-up costs:

location design and construction
professional fees
equipment and fixtures
furniture
opening inventory and supplies
insurance
pre-opening labor
opening advertising and promotion

Estimate how much working capital you will need (the money you will need until the business becomes profitable--include your living expenses, if necessary):

salaries
insurance
utilities
advertising
rent
interest on a loan, if applicable

Brainstorm where you might be able come up with money:

yourself
family
friends
savings and investments
a partner
selling personal assets
loans

DETERMINE IF YOU CAN MAKE ENOUGH MONEY TO MAKE THE VENTURE WORTHWHILE

Estimate the profit potential for the business:

income
expenses
profit (income - expenses)

Think about the amount of time and energy it will take to make the business successful. Make a decision as to whether you think you can make enough money to make the entire venture worth your.

What are your options when you begin your business?

Before buying any business, you must carefully consider many factors that are critical to your success:

COSTS YOUR ABILITIES

How much money will this franchise cost before it becomes profitable?
Can I afford to buy this franchise?
Can I make enough money to make the investment worth my time and energy?
Do you have the technical skills or experience to manage the franchise?
Do you have the business skills to manage the franchise?

DEMAND COMPETITION

Is there enough demand in your area for the franchisor's products or services?
Is the demand year-long or seasonal?
Will the demand grow in the future?
Does the product or service generate repeat business?
How much competition do you have, including other franchisees?
Are the competing companies/franchises well established?
Do they offer the same products and services at the same or lower prices?
Is there a specialty or niche you can capture?

BRAND NAME TRAINING & SUPPORT

How well known is the franchise name?
Does it have a reputation for quality?
Have any consumers filed complaints with the local Better Business Bureau?
What kind and how much training and support does the franchisor provide?
Do existing franchisees find this level of training and support adequate?

FRANCHISORS EXPERIENCE EXPANSION PLANS

Has the franchisor been in business long enough to have established the type of business strength you are seeking?
Is the franchisor planning to grow at a rate that is sustainable?

Questions About Your Ability to Become a Successful Franchisee?

For most of these questions you’ll rely on yourself for the answers. However, people who know you well and are not afraid to give you objective feed-back can also provide helpful answers. For some questions, you may want to contact an advisor to help you think through all the related issues.

Why do I think I’m a good fit for franchising? Why will it work for me? Do I know that my personality is a good fit for franchising in general, and for specific kinds of franchises (i.e. retail, service, food, etc.)?
How much money can I comfortably afford to invest in a franchise?
Do I like following a system or would I real-ly prefer to create my own system?
Am I a good manager? Do I want to employ and manage people?
How long could I survive in a business without getting a paycheck?
Would my family support me if I become a franchisee?
Would investors support me, i.e. invest in me, as a franchisee? If I had to borrow money to invest in a franchise, where would I borrow it?
Do I like to market and sell?
Do I like serving people, including people who can be “ugly” customers?
What kinds of businesses interest me? What products would I like to sell, or what services would I like to represent? Am I a customer of any franchises that interest me?
If I were a businessperson, what could I do better than someone else?
What scares me about becoming a franchisee?
Who could I consult with about becoming a franchisee?
Can I earn more money as a franchisee than I can as an employee?

Questions About Franchise Opportunities?

Earlier questions focused on franchising in general and “matching” yourself to franchising. Now you’re looking at specific franchise opportunities and you’ll need to get answers from franchisors, franchisees, and disclosure documents.

What are the common features of these franchises? Why am I attracted to this type of franchise opportunity or brand?
What’s not right (if anything), or what makes me uneasy, about these franchise opportunities?
Why would I invest in these franchises as opposed to starting a similar business my-self?
What does the Founder or President of each of these franchise opportunities say about the company’s future? Do I agree with what he/she says?
How much is the franchise fee? How does one franchisor’s fee compare to competitive franchisors? Is the fee refundable? What does it include? Do franchisees agree that the fee is reasonable?
How much training do I get when I invest in the franchise? Do I think I’ll need more training? If so, where would I get it? How good is the training the franchisor provides? Do most franchisees say the training is worth the investment? Who conducts the training classes--one person or multiple people? What are the trainer’s qualifications? Where is the training conducted? For how long? Do I have to pay for the training?
After I become a franchisee, who will I communicate with at the franchisor’s head-quarters? Do I think I can work with this person?
After I become a franchisee, what kind of support will I get? Do the franchisees say the franchisor’s support is effective? Do I have to pay for any of the support? How is the support provided? By phone? In per-son? By Internet?
If I have a question that I can’t answer while a customer is standing in front of me in my business, how difficult will it be to reach the franchisor to get a quick re-sponse?
Do I get an Operations Manual? Do the franchisees say it’s valuable? How often is it updated? Are the updates available online?