Franchising: The Basics for Beginners
Posted on October 21, 2010 by My Franchise Law
Buying a franchise can be an excellent way to go into business while having the security of a tried and true business plan for success. It can take much of the trial and error out of the equation that independent business owners often go through, because you can instead work from a template of an already proven business model and focus your time on perfecting your operation. When deciding whether a franchise business is right for you, it’s important to know the basics such as how they function and what you can expect from your franchisor-franchisee relationship before you jump in any further. Here is some basic franchise business information to help you get started:
What is a Franchise? A franchise is defined as an agreement between the franchisor and franchisee, wherein the individual buying into a franchise will market a product or service created and provided by the franchisor. It is a form of business ownership where you are halfway functioning as your own boss, as a business owner, but also working within an established organization and system. Franchising offers business owners the ability to work for themselves, but with the security of an existing framework and support to help them achieve success. However, franchising is not a magic formula, and franchisees will still have to have strong entrepreneurial skills and the dedication to ensure the business functions to the best of its ability.
The Financial Exchange: For the privilege of working within the franchisor’s system, the franchisee must pay certain royalties and fees back to the parent company, and there can be a lot of variation from one organization to the next, so it’s best to do research in order to get the franchise business agreement that will work for you. At this stage in the process it is extremely important to have an experienced franchise lawyer to help you negotiate contracts. In return for this financial exchange, the franchisor can provide support, marketing, and the initial framework to get the new franchise owner’s business started – again there can be variations in the level of support you will receive from one franchise business to the next, so some research and franchise evaluation will be required. A franchise lawyer would be able to assist you in creating a comprehensive franchise evaluation report.
The Two Main Types of Franchise: When looking to buy a franchise, you will find that there are two main types to choose from, business franchise, and product/trade name distribution franchise. For business format franchises, the franchisee receives the whole setup to start their own business, including trademarks, logos, marketing, a clearly defined business plan, as well as ongoing support from their chosen franchisor, in exchange for an upfront franchise fee and ongoing royalties. Examples of this include fast food restaurants, gyms, cleaning agencies, and copy centers, which all must be run according to the predetermined structure established by the franchisor, and maintain a set of standards laid out for them in their franchise contract. For product/trade name franchising, it is a much simpler affair, with franchisors providing a product, advertising, and branding, so that the franchisee can sell their wares in their chosen location—examples of this form of franchising include soft drinks and office supplies.