WHAT IS A FRANCHISE?
Franchising is a method of distributing products or services. In a franchise system: (1) the franchisor, lends his trademark or trade name and a business system; and (2) the franchisee, pays a royalty and often an initial fee for the right to do business under the franchisor’s name and its business system. In a textbook, the term “Franchise” is the contract binding the two parties, but the term ‘Franchise” is often referred to the actual business that the franchisee operates.
WHAT ARE THE ADVANTAGES OF FRANCHISING?
In today’s market place there is nothing that comes close to guaranteeing the success of a new business as much as franchising. Over the decades franchising has proved its strength even during difficult economic times. A franchised business minimizes risk of failure and increases your chances of success. So what makes Franchising such a successful global phenomenon?
- The franchisor provides a complete plan or business format to the franchisee, for managing and operating the franchise business.
- The major advantage of buying a business format franchise is that the “system,” the means for distributing goods and or services, has been developed, tested, and associated with the trademark.
- The business format provides step-by-step procedures for the establishment of the business and, providing management support anticipating most management problems, also provides a complete matrix for management decisions confronted by the franchisees.
- Through franchising, a rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.
- Over 90% of all franchisees report profitability.
- You have the opportunity to build your capital as well as your earnings.
- As a franchisee it is your business and you are the owner manager, providing you follow the system, you decide what goes.
- The major banks are very supportive of franchising and there are good financing options available.
WHAT IS FRANCHISE DISCLOSURE DOCUMENT (FDD)?
A Franchise Disclosure Document (FDD) provides information about the franchisor and its franchise system to franchisee. It provides all information necessary information about the business to the prospective franchisees including financial information, cost to start and maintain business, and support that a franchisee will receive from the franchisor.
It is important that you seek professional advice to better understand the terms and conditions of a Franchise Disclosure Document as some of them might be negotiable.
WHAT IS FRANCHISE AGREEMENT?
The franchise agreement defines the terms of the relationship between the franchisor and franchisee. It is a legal, written document that governs the franchise relationship and specifies the terms of the franchise contract. We strongly recommend that as a prospective franchisee you should review the franchise agreement with a professional franchise advisor before you make the final decision.
WHAT SHOULD YOU CONSIDER BEFORE BUYING A FRANCHISE?
They are many things that you should consider before buying a franchise:
- Do you have the experience required to run your franchised business?
- Do you have a complete understanding of the business?
- The time and personal commitment required to establish and run the business,
- Profile of the franchisor, its franchising support system, do they have good track record? can you trust these people to build a long term business relationship?
- Speak to other franchisees, find out how they are doing in that franchise system,
- What would be the cost to start that franchise,
- What are your obligations as a franchisee? What are the ongoing fees and royalties that you are required to pay?
- What products and services you need to buy from the franchisor, how these can be sourced?
- The financial strength of the franchisor and its business model.
- The terms and conditions of the franchise agreement, can it be terminated or renewed, are you legally and commercially protected as a franchisee?
We strongly recommend that you should seek assistance of an experienced franchise consultant, they can help you to make a wiser decision to save you costs and valuable time. They can also provide you franchising legal advice from a franchise lawyer who understands franchising laws, particularly the antitrust laws, the trademark laws, and all other applicable state laws. They can also provide you initial accountancy advice to give you an exact idea of your investment and level of expected profits.