FAQs About Buying a Franchise
Franchising is a popular way to own your own business. Like every business, franchising has its advantages and disadvantages. While some entrepreneurs love franchising and are hugely successful at it, others dislike being governed by the rules of a franchising brand. These FAQ’s can help you figure out whether buying a franchise would be a good option for you.
1. What are the advantages of franchising?
The biggest benefit of buying a franchise is the use of an established brand to market your business. When you start a new company from scratch, you generally have to put in a tremendous amount of time and money into marketing, advertising and networking in order to achieve brand recognition and attract customers. Franchises, on the other hand, are already well known to the public and come with a built-in customer base, allowing you to save the money and time you would spend just to get your name out there.
You will also have the advantage of following a business model that has already proven successful, eliminating the trial-by-error method of developing your own system. Following the business model also means that you receive training and support. During training you learn the operations of the franchise, how it markets, hires and runs the day to day operations. You also can see the size of your support. You are trained to be comfortable with the operations so that you can open and operate on your own. You have the ability to negotiate additional training or support staff to help you when you open your own location.
2. How does franchising work?
The typical franchise model is based on paying a franchisor a fee and the franchisor providing certain branded goods or services to the franchisee. The franchisor is the owner of the original business and concept, franchisor holds the rights to the trademark and the business system. The franchisee obtains the right to operate under the franchise name, by paying a franchisee fee, weekly or monthly royalties, and some additional fees to the franchisor.
3. How is the franchise relationship formed?
When you decide on which franchise (the franchisor) you are ready to buy, you (the franchisee) will need to contact the prospective franchisor and their franchise department. After completing some basic questionnaires and becoming what they deem to be a qualified franchisee the franchisor will present you with a Franchise Disclosure Document (FDD) and a franchise agreement. These documents are required by the Federal Trade Commission. These documents detail your and the franchisor’s rights and obligations in the franchise relationship. The FDD will help you to understand the franchise model, fees and commitments that you and the franchisor will have when you purchase the franchise. To stay in the franchisor’s system you must adhere to the rules and regulations. Franchises differ in the amount and details of their rules for franchisees. No matter the franchise you pick you will have to follow your franchisor’s manuals and procedures. It is best to call a franchise attorney after receiving the FDD so that they can review the FDD with you and negotiate any terms on your behalf.
4. What types of business are usually franchised?
Most associate franchising with restaurant chains and fast food, but many other service providers have expanded through franchising, like: pool cleaners, real estate agencies, hotels, printing services, cleaners, landscapers, construction firms, advertising and more.
5. Am I ready to franchise?
To be ready to franchise you need to ensure that you have enough capital to open the franchise business and enough carrying costs for the business to be operational for approximately 6 months. You also have to be ready to follow the rules and regulations of a franchise organization. Next you need to ensure that you have chosen a franchise that suits your personality and goals. Then you need to know that the franchise you are buying into is successful and will allow you to see a financial profit.
You will want to avoid a Franchise Disclosure Document that ties you to a waning brand or that transfers the bulk of your profits to the franchisor in various fee forms. Make sure you talk to franchisees and have your legal professional review your Franchise Disclosure Document and franchise agreement before signing. You want to know that your rights are protected and that all provisions are acceptable to you. Remember once you sign your agreement it can be extremely difficult to get out of it or to renegotiate any terms.
Learn More About Franchise Law
Franchise law can be complicated and there are common pitfalls that can escalate if ignored or not addressed effectively.