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Background on Franchises and How to Choose The Right One For You

Written by: Paul Linenberg

Article Overview: This brief article explains the history of franchising, explains why to choose a franchise over other business opportunities, and lists some of the key points to evaluate when you're considering the purchase of a franchise.

Background on Franchises and How to Choose The Right One For You

Background on franchises
Franchising has it's beginnings back in the mid 1800s, and is simply one method of distributing products or services. At least two levels are involved in any franchise system: a. the franchiser (also franchisor), who provides its trademark, trade name and/or a business system; and b. the franchisee, who pays an initial investment and ongoing fees for the right to do business under the franchiser's name. The word 'franchise' technically refers to the operations of the franchisee. Today, there are thousands of successful franchisers and many more successful franchisees that provide products and services to consumers and businesses all around the world. This guide was created to provide you a basic understanding of how franchising works so that you can shop wisely for the franchise opportunity that's right for you.

Important features of franchises
The basic advantage of franchising is for the franchisee is that the franchisee gets to take advantage of a proven business system. This helps reduce the risk that the business will fail because the franchiser has a track record of success. Here are some other advantages to franchisees:

Training and Support
Nearly all franchisers provide you with the training and ongoing support you need to become and remain successful. They have a vested interest in you being able to run the franchise profitably and succeeding in your business because the more profits your franchisee makes, the more money the franchiser makes.

Brand Awareness
Absent a franchise, it can take years for a business to successfully build a well-recognized brand that helps drive sales and provides an advantage over other competitors. Brand awareness can make or break a business, and franchises can provide instant and proven brand awareness without the time and effort that would otherwise be required.

Purchasing Power
Most franchisees have the ability to purchase their goods, products, and supplies at reduced rates because they use the combined buying power of all the franchisees to buy in bulk. When buying into a franchise, you are able to take advantage of these bulk discounts without having to build up any purchasing power yourself.

Proven Business Plan
Most of the thoughts, mistakes and successes of a business have been worked out by the franchiser, so you as the franchisee can avoid these mistakes and focus on the successful processes.

Advertising
In addition to providing an established brand name and business system, most franchisers support their franchisees with local and national advertising and promotions to help drive sales. Of course, this advertising is at least partially paid by the initial investment and ongoing fees that you pay to the franchiser.

Disadvantages of franchising
In exchange for the security, training, and marketing power of the franchise trademark, you do give up some of your business independence. The franchiser has an important interest in making sure that all franchisees operate within a certain set up guidelines and procedures, and franchisees must comply with these various controls and procedures. Because of these constraints, the franchisees could end up missing opportunites if the franchiser does not recognize the same opportunities and/or react to the market place in the same way the franchisee would.

Legal protection
There is a federal regulation that requires franchisers to prepare and provide an extensive disclosure document to any prospective franchisee prior to the purchase of a franchise. The disclosure document is called a Federal Disclosure Document (FDD). Within the FDD are about two dozen different categories of information about the franchiser and franchisees, including required fees, initial investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchiser, earnings claims, and so on. Also, several states require franchise companies to file or register their franchise offerings with a state agency.

How to choose the best franchise for you
When considering a franchise opportunity, it is very important to consider the overall growth within the industry. Next, it is important to evaluate an individual franchiser's operation and track record within that industry. A growing franchise in a declining industry, or an unsuccessful franchise in a growing industry should raise red flags as to the long-term potential for success. A newer franchise in a newer industry without a decent track record might also require more diligent investigation.

You should know that despite the advantages of owning a franchise, it is still possible to lose money when opening and managing a franchise. Be particularly wary of any franchiser that "guarantees" a profit or success, even if the guarantee is not explicit. If you hear a claim about a franchise company that sounds too good to be true, the idiom is that it probably is. Make sure to independently confirm all claims of earnings made by a franchiser.

When searching for the franchise opportunity that is right for you, it's best to find out the entire universe of franchise opportunities. Virtually all franchisers have some online presence, so this should be the focus of your search. Once you have a list of possible franchises, it's time to start narrowing down the list by focusing on your budget, your specific expertise, and your area of interest (not necessarily in that order). In addition, the IFA (International Franchise Association) recommends that prospective franchisees evaluate franchisers in the following areas:

1. the type of experience required to operate the franchised business;
2. a complete understanding of the particular business;
3. the time and personal commitment necessary to run the business;
4. who the franchiser is, what its track record has been, and the business experience of its management;
5. how other franchisees of the same franchiser are doing;
6. the cost to get into the franchise. Total initial 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.
7. your ongoing costs related to the franchiser;
8. if there are any products or services you are required to buy from the franchiser and how and by whom they are supplied;
9. the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the franchiser system in the past few years;
10. the financial condition of the franchiser.
Once you have identified a 'short list' of potential franchisers, your next step is to contact the companies directly for more information. Ask each franchiser for a copy of their FDD and make sure to understand it in its entirety. In addition, you should:

- Hire a lawyer and/or accountant who understand franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws.

- Read and understand all disclosures, franchise agreements, and other legal documents. Do not just leave this up to your lawyer, as it is very important for you to have an thorough knowledge of this information.

- Require everything a franchise representative says to be put in writing.

- Analyze your local market and make sure there is a need for your product both today and into the future. Research your competition, and evaluate the prospective franchiser's growth and prospects for future growth.

- Contact both current franchisees and ask them for both the positives and negatives associated with owning their franchises. Ask the franchiser for statistics relating to success and franchisee dropout rates.

- Make sure to understand what sort of initial investment is required and what sort of financing is available. Make sure that you are appropriately funded and have adequate reserves as a lack of investment capital could turn all of your early expenditures into a business loss.

- Understand what training and support is provided both on an upfront and ongoing basis, and whether or not you will receive any assistance in finding and developing a location.

- Get details as to who will be the source of your inventory and supplies, what requirements you have to purchase inventory from the franchiser, and what freedom or flexibility you have to purchase your own inventory if desired.

- Establish a relationship with the key management personnel of each prospective franchise company, especially for smaller or newer franchise companies. Get to know the representatives that you will be working with initially and on an ongoing basis.

Finally, we hope you have found the information in this guide helpful. We understand that there is more to franchises than what is included here, and we suggest that you use this guide as a starting point in your search for the right franchise for you.

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Article Tags: brand awareness, business system, consumers, franchise opportunity, franchise system, franchisee, franchiser, franchisers, franchises, franchisor, initial investment, mid 1800s, money, ongoing support, profits, purchasing power, risk, successful franchisees, vested interest



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