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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


Learn More in the Library's Blogs Related to Starting a Business

In addition to the articles on this current page, also see the following blogs that have posts related to Starting a Business. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.

Library's Business Planning Blog
Library's Building a Business Blog
Library's Consulting and Organizational Development Blog
Library's Leadership Blog
Library's Strategic Planning Blog
Library's Supervision Blog


For the Category of Entrepreneurship (For-Profit):

To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.

Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.

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