All About Franchising: Guidelines and Resources

Sections of this topic

    All About Franchising: Guidelines and Resources

    Sections of This Topic Include

    Introduction to Franchising

    What is a Franchise Business?
    Pros and Cons of Buying a Franchise

    Preparing to Become a Franchise Owner

    Is a Franchise Right for You Personally?
    Alternative: Start New Business From Ground Up?

    Selecting the Right Franchise

    Typical Process to Become a Franchisee
    Use a Franchise Broker?
    Research Franchise Opportunities
    Do Your Due Diligence!
    Before Signing the Franchise Agreement

    Funding Your Franchise

    Draft a Business Plan
    How Much Money Do You Need?
    Sources of Funding for Franchises

    General Resources

    Franchise Organizations
    Sources of Franchises
    Franchise Laws
    Glossaries of Franchise Terms

    Also consider
    Related Library Topics


    INTRODUCTION TO FRANCHISING

    What is a Franchise Business?

    You have probably heard the term “franchise” and already have a sense
    of what it means. When learning more about franchising, it helps to consider
    franchising as a very popular business model. It includes two key roles:

    1. The franchisor, who is a person or organization that owns
      certain assets, including proprietary products and services, business practices
      and intellectual property (especially the business’s brand, for example, its
      name, logo and colors).
    2. The franchisee, who is a person or organization that has
      gained the rights from the franchisor (by signing a Franchise Agreement) to
      use its assets, while also selling its products and services.

    The franchisee is usually referred to having “bought the franchise,”
    even though the franchisor is the owner of the franchise itself. (Technically,
    the Agreement between the two parties is the “franchise”.)

    As you know, there are numerous everyday examples of this. Think of the most
    common fast-food restaurants that you have probably drive by almost everyday,
    such as McDonald’s, Ace Hardware, Midas muffler shops, Pizza Hut, Taco Bell
    and Subway.

    Also consider
    What
    is a Franchise?
    The
    Franchise Business Model 101 – An Introduction

    Franchising
    101: The Basic Terms, Tips, and Facts You Need to Get Started

    Pros and Cons of Buying a Franchise

    Pros of Buying a Franchise from a Franchisor

    Depending on the terms in the franchisor’s Franchise Agreement, the benefits
    for the franchisee can include:

    • A time-tested business model, including its products and services, operating
      practices and intellectual property
    • The familiarity and reputation of the brand (research shows customers are
      often more loyal to an organization’s brand than to its products and services)
    • Access to a group of customers who are loyal to the brand (the extent of
      the access depends on the location of the franchise)
    • Training programs about operating the business model itself
    • Ongoing advice and support from the franchisor about starting and operating
      the franchise
    • Savings in time, effort and money from otherwise having to start a new business
      model from the ground up
    • The franchisor’s ongoing advertising of the franchise’s products and services
    • Easier access to get business funding because lenders’ loans are servicing
      a proven business model
    • Franchisor’s discounts on prices of supplies and inventory

    Cons of Buying a Franchise

    Depending on the terms in the franchise agreement, the challenges for the franchisee
    can include:

    • Significant startup costs, including an initial, one-time franchise (or
      license) fee often between $50,000 to $500,000
    • Ongoing royalty payments, usually monthly and based on a percentage of the
      franchisee’s monthly revenues
    • Facilities costs, including of property and buildings to match the franchisor’s
      requirements
    • Frequent monitoring of the franchisor’s rules and regulations, which could
      be updated at least annually
    • Ensuring strong conformance to those rules and regulations
    • Regular reporting of operations and financials to the franchisor
    • A reputation that is always tied to the franchisor’s, as well

    Also consider
    The
    Pros And Cons Of Buying A Franchise
    Have You Considered Alternatives? (add root URL)
    What
    Are Your Options When You Begin Your Business

    Franchise or New Venture?
    That Depends on You
    What
    Are the Alternatives to Franchising?


    PREPARING TO BECOME A FRANCHISEE

    Is a Franchise Right for You Personally?

    If you are thinking about buying a franchise now, then there are some hard
    questions that you should be asking yourself. The more honest that you are with
    yourself, the less likely that your new franchise will be a big problem later
    on in your life. This article Entrepreneurs
    — Are You Personally Ready to Start a New Venture?
    will help you to answer:

    • Are you really enough of an entrepreneur to run a new business, even if
      a franchisor has done much of the work for you already?
    • What are your passions in life? How can you ensure they remain in the nature
      of the work in your new franchise?
    • What is your stress level now? It will likely increase as you start your
      new business.
    • What are your personal strengths and weaknesses that will affect the success
      of your new business? How can you use your strengths to deal with your weaknesses?
    • Are your personal finances in shape? What attention do they need now to
      prepare for getting even more funding to operate your new franchise.

    Also consider
    Should
    I Buy a Franchise?

    Is
    Buying a Franchise a Good Idea?
    Nine
    Questions to Ask Before Buying a Franchise
    The 2 Most Important
    Steps in Deciding If Franchising Is a Good Fit for You
    Will There Be Potholes
    on the Road to Franchise Freedom? Yes. There Will Be 7, to Be Exact.

    Alternative: Start a New
    Business From Ground Up?

    Since you are interested in starting a new business as a franchise, don’t forget
    about the option to start a business from scratch. Here are some pros and cons
    regarding that decision.

    Pros of Starting Your Own Business From Ground Up

    • You will likely have lower startup costs than in starting a new franchise,
      unless your business idea would involve extensive and ongoing manufacturing
      activities.
    • You can follow your own creative instincts and make your own decisions,
      rather than closely conforming to those of the franchisor.

    Cons of Starting Your Own Business From Ground Up

    • The startup activities and the time required are significant. (See the tasks
      in the Reference
      Manual for How to Start a Business
      .)
    • The time it takes to start and operate your own new business until you are
      getting profits can be substantially longer than in buying a franchise.
    • Financing might be more difficult to get as compared to financing a franchise
      that has an already well known brand.
    • It is usually riskier to start your own business model if there is currently
      no proof of strong markets and sales, as there would be with a franchise

    Also consider
    What
    Are Your Options When You Begin Your Business

    Franchise or New Venture?
    That Depends on You
    What
    Are the Alternatives to Franchising?
    Have
    You Considered Alternatives?


    SELECTING THE RIGHT FRANCHISE

    Typical Process to Become
    a Franchisee

    The article Your
    Guide to Pros and Cons of Owning a Franchise
    describes the following typical
    process to start a franchise:

    1. Research to find a franchise that best suits your interests, funding, location,
      etc.
    2. Contacting the franchisor and submitting an application
    3. Financial and legal review of the franchisor’s FDD and Franchise Agreement
    4. Creating a business plan that details how you expect to make a profit, as
      well as using the plan to get sufficient funding
    5. Signing the Franchise Agreement and paying the initial fee
    6. Franchise training to meet the franchisor’s requirements
    7. Preparing for a grand opening to formally start your operations and invite
      customers

    Also consider
    How
    to Franchise a Startup: 4 Tips for Success
    How to Open
    a Franchise in 7 Easy Steps
    How to Start a Franchise
    in 8 Strategic Steps
    Want
    To Franchise Your Small Business? 8 Tips To Get Started
    How to Start
    a Franchise in 10 Steps

    Use a Franchise Broker?

    A franchise broker is a person who works with you to help you select and buy
    the best franchise, much like a real estate agent helps you to buy a home. Similarly,
    the brokers usually work for the franchisors, as real estate agents usually
    work for the home sellers.

    Thus, the franchise broker’s true allegiance is to the franchisors. So if you
    use a franchise broker, you need to be sure who is paying the broker and how
    you can ensure that the broker is helping you at least as much as the franchisor.

    Consider
    What
    You Should Know About Working With Business Brokers
    Should
    You Use a Franchise Consultant or Business Broker When Looking to Buy a Business?

    How
    to Sell Your Business With a Broker—12 Quick Tips
    How
    to Choose the Right Business Broker
    Business
    Buyers Be Aware and Beware

    Research Franchise Opportunities

    There is no shortage of sources of franchise opportunities. Most important
    for now, though, is to get clear on what you really want in a franchise. For
    example:

    • What is your primary reason for doing a franchise? Money? Learning? The
      Challenge? Use current skills?
    • What industry do you want it to be in?
    • Will it be seasonal, eight hours a day or 24/7?
    • When do you want to start the franchise?
    • What kind of risks can you tolerate?
    • How much money do you have to invest?
    • What kind of lifestyle do you want?

    Also consider
    How
    to Choose the Right Franchise for You
    Quiz
    to Help You Select the Right Type of Franchise
    How
    to Determine Which Franchise Business is Best for You
    The Eight
    Things to Look For in a Franchise Opportunity
    How
    To Find A Franchise Startup With Potential

    Now it might be useful to consider Sources
    of Franchises
    listed in General Resources near the end of this document.

    Do Your Due Diligence!

    Understand Types of Franchise Illegalities

    Franchising is a very popular way to start a business. Consequently, there
    are a wide variety of ways that a person might be cheated when considering to
    buy a franchise or is already operating one. For example, some ways are:

    • Franchisors putting undue pressure on potential franchisees to quickly sign
      agreements well before the franchisee has had reasonable time to review them
    • Franchisors improperly making or withholding critical financial, operating
      and performance information
    • Franchisors inappropriately using confidentiality agreements or gag orders
      to withhold critical information to franchisees
    • Franchisors promising certain levels or amounts of profit to be made by
      the new franchise
    • Franchisors who renege on their promises, thereby hurting the already operating
      franchisees
    • Franchise brokers misrepresenting information about their roles and make
      improper recommendations about which franchises to buy

    Also consider
    Franchise
    Fraud

    Franchise
    Fraud: Wake Up and Smell the Fine Print
    Protect
    Yourself From Franchise Fraud
    How You Can Avoid
    Being a Victim of Franchise Fraud

    How Franchisors are Managing Franchisee Fraud

    Checklist to Do Your Due Diligence

    Due diligence includes the activities to identify any potential problems in
    a certain franchise well before it’s too late to easily fix them. Questions
    to get answered should include the following:

    Could You Manage the Business Yourself?

    Does the nature of the franchise’s activities match your skills and expertise?
    Or would you need a business partner to help you? (A business partner would
    likely want part ownership.)

    Investigate if There’s Been Complaints

    Contact the Better Business Bureau. Their services are free. Ask for any information
    they can give you. Make sure it matches the franchisor’s Franchise Disclosure
    Document (mentioned later on below).

    Talk to Other Franchisees

    For example, ask them: What do other franchisees say about the skills that
    are needed to run the franchise? What are your actual costs compared to those
    asserted by the franchisor? What is the quality of the support that you have
    gotten from the franchisor? How strong is the franchise’s brand recognition?
    What do you wish the franchisor would do even better?

    Do Your Market Research

    Do market
    research
    to answer these questions: What is the best location for your franchise?
    Is there strong likelihood of people wanting the franchise’s products and services
    in your preferred location? What are the likely competitors? How could you compete
    against them?

    Thoroughly Examine the Franchisor’s FDD

    Do a deep
    drive
    into franchise’s Franchise
    Disclosure Document (FDD)
    The franchisor must provide you a copy. The FDD
    includes a great deal of useful information, for example about various startup
    and ongoing costs for the franchisee, responsibilities of both parties, and
    typical income and expenses of a new franchise business.

    Thoroughly Examine the Franchisor’s Franchise Agreement

    Ask for a copy of the Franchise
    Agreement
    , which is the contract that you would sign to formalize your franchise
    relationship. Have a lawyer closely examine the Agreement. (The next section
    includes more advice about the Agreement.)

    Pose Your Questions to the Franchisor

    Interview
    the franchisor
    and ask the hard questions that you’ve identified so far.
    Record all of the conversations that you had with the franchisor. The following
    articles suggest more questions that you should get answered and how to get
    them answered.

    Also consider
    Due
    Diligence Checklist for a Franchise

    How
    to Perform Meaningful Due Diligence When Investigating a New Franchise Opportunity
    Doing
    Your Due Diligence

    Before Signing the Franchise
    Agreement

    Do not sign the Franchise Agreement until you have had it closely reviewed
    by an attorney who has experience with franchise agreements. Also, be sure to
    include all of the promises that the franchisor made to you during your discussions.

    Also consider
    Read
    Before You Sign The Franchise Agreement
    10 Things About Franchise
    Contracts- Part 1
    The Franchise Agreement
    (What to Expect Before Signing)
    Completing
    and Signing a Franchise Agreement: Things to be Clear on Before Making It Official

    What
    to Consider Before Signing a Franchise Agreement


    FUNDING YOUR FRANCHISE

    Draft a Business Plan

    The benefits of a business plan are many. However, the most important benefits
    now are that the plan will ensure that you have carefully planned your franchise
    and that you have a strong case to get funding. Most lenders will want to see
    a business plan, even for buying a franchise.

    The Library’s topic All
    About Business
    planning will guide you step-by-step through the process
    of developing a business plan that is highly customized to your situation. The
    topic will suggest that you use especially the growth type of business plan,
    rather than a startup business plan, because the business model of your franchise
    has already been proven.

    How Much Money Do You Need?

    Do a Business Budget

    When computing how much money you will need, you should draft a business budget
    at least for the first year of operations. (That budget might have already been
    included in your business plan. The franchisor also might help with developing
    the budget.) Overall, the one-year budget should include:

    1. An estimate of the total of one-time and recurring costs (these are mentioned
      in the following paragraphs)
    2. Minus whatever money that you can directly contribute, such as from personal
      savings, family and friends
    3. The remaining total is what you need to raise from your business funding
      activities.

    Also consider
    Building
    Your Franchise Budget

    Fees to the Franchisor

    The types of costs that a franchisee can incur include the following. (The
    franchisor’s FDD document should specify the costs and how they are determined.)
    They can include:

    • One-time franchise or license non-refundable fee often between $50,000 to
      $500,000
    • Ongoing royalty payments, usually monthly and based on a percentage of monthly
      revenues
    • Ongoing advertising fees, usually a percentage of monthly revenues (the
      franchisor puts the money from the fees into a pool to do national, regional
      and local advertising)

    Also consider
    What
    is a Franchise Fee?

    Other Typical Startup Costs

    • One-time facilities startup costs, including property and buildings to match
      the franchisor’s requirement
    • License fees (usually annual) required in your state and municipality
    • One-time professional fees, including for an attorney and accountant, ideally
      with experience in franchising
    • One-time cost of your own marketing and development to promote a grand-opening
      to formally announce the start of operations and invite customers
    • Ongoing costs of materials and supplies to develop and provide products
      and services
    • Ongoing labor costs to recruit and train personnel

    Sources of Funding for Franchises

    It can often be easier to get funding to buy a franchise than it is to start
    a new business from the ground up, because lenders can recognize the credibility
    of the franchise and realize that it has already been operating as a viable
    business. Therefore, the lenders believe there is more likelihood that they
    will be paid back, than if the business is a new one. Options for the franchisee
    to get money can include:

    • Angel
      investors
      — These are wealthy individuals or groups who invest in startups
      to make a profit and/or to assist a business that is closely affiliated with
      their interests or causes.
    • Bootstrapping
      This means using your own personal sources of funds (savings, retirement funds,
      home equity line of credit, etc.). The more of your own money that you put
      in, the more inclined investors are to help you. Also, the less that you will
      have to borrow and pay back.
    • Business
      partners
      — They can bring knowledge of the industry, but will likely
      require partial ownership in the business.
    • Commercial
      bank loans
      — This depends on the quality of your business plan, credit
      history and available collateral.
    • Credit
      unions
      — These are usually at a lower interest rate than commercial banks.
      You need to be a member of the credit union.
    • Crowdfunding
      – This source includes a marketing campaign via social media that aims to
      raise small amounts of donated money from numerous individuals and organizations.
    • Friends
      and family
      — This can be a quick source of small amounts of funds, but
      be sure to still do a formal agreement.
    • Franchisor financing
      — This might include waiving the franchise fee, offering low-cost loans or
      partnering with other lenders to help you, as well as offering discounts on
      supplies.
    • Microloans
      – These are small, short-term loans with a low-interest rate intended for
      small businesses.
    • Small Business
      Administration (SBA) loans
      — This is useful especially if the franchise
      is already SBA-approved. It can be easier to get than a commercial loan, but
      the time to qualify and process a loan is typically longer than for a bank.

    The 6 Best Financing
    Options for Franchising a Business
    How
    to Get Financing to Buy a Franchise
    Where
    to Find Franchise Financing
    How
    to Buy a Franchise on a Limited Budget
    How to
    Start a Franchise with No Money


    GENERAL RESOURCES

    Franchise Organizations

    American Association of Franchisees and Dealers
    FranchiseHelp
    Franchise Research Institute
    Franchise Times publication

    Franchise Laws

    Federal
    Franchise Rule
    The
    Franchise Registration States
    What
    Are the Franchise Laws?
    What
    is Franchising Law?

    Sources of Franchises

    SBA Approved Franchises
    International Franchise Association
    Franchise Registry
    Franchise
    Times

    Franchises for Sale

    Glossaries of Franchise Terms

    Franchise
    Glossary
    find more?
    What
    Are Common Franchise Terms?
    Franchise
    101: 10 Terms You Need to Know


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