This self-paced training exercise presents an overview of franchising, as well as how to determine if franchising is right for you, and how to choose the right one.Topics include defining franchising, pros and cons of owning a franchise, and how to determine if franchising is right for you.
Duration of the course: 00:30:00
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1.3 Course Topics
There are several topic sections within the course. Each section covers a different aspect of franchising. Some of the areas covered include:
• Definition of franchising
• The pros and cons of owning a franchise
• Investigating your options
• Is franchising right for you?
Numerous additional resources are identified to assist you. Visit the resource icon in the course player or locate additional tools, templates, and mentors on SBA.gov once you finish the course.
Let’s get started!
1.4 What Is Franchising?
Owning your own franchise can be a great way to start a small business without taking on the risks that are associated with starting from scratch.
A franchise is a license to use the name, trademarks, and proprietary products of an existing company. Owning a franchise allows you to distribute the company’s products as well as to use
their business systems. These may include national marketing, accounting, point-of-sales information, site selection, and site acquisition.
In exchange for these rights and services, the franchisor receives an upfront fee for the rights to a geographic area, as well as royalties based on sales.
1.5 Types of Franchises
There are two primary forms of franchising: product/trade name franchising and business format franchising.
In product /trade name franchising, a franchisor owns the right to the name or trademark and sells that right to a franchisee. This is most often seen in the soft drink or automotive industry, where a product is sold or distributed through a franchisee.
Business format franchising is when the franchisor and franchisee have an ongoing relationship, and the franchisor provides a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
1.6 The Pros and Cons of Owning of a Franchise
In order to determine whether franchising is right for you, you must first evaluate the pros and cons.
A good franchise offers site selection assistance, training, purchasing power, marketing plan, brand recognition, and financing.
The cons of owning a franchise include the lack of control of certain business decisions, such as marketing and product offerings; the length of contracts; and the cost of exiting the franchise.
1.7 Investigating Your Options
There are approximately 3,000 different franchise companies operating in 80 different industries. So how do you know which company is right for you? The answer is Market Research.
Franchise opportunities can be identified through Internet research, in magazines such as Entrepreneur, Success, and Inc., or in various trade journals such as the Franchising World, Wall Street Journal and USA Today.
You can also reach out to franchisors to help you during this process.
1.8 Research the Franchisor
Once you have conducted market research and decided on a business that you are interested in, the next step is to research the franchisor. You risk losing a significant amount of money if you do not investigate a business carefully before you buy.
By law, franchise sellers must disclose certain information about their business to potential buyers. Make sure you get all the information you need first, before entering into this form of business.
Consider the following questions during your research:
1. How long has the franchisor been in the industry?
2. How many are currently operating in your area?
3. What is the financial health of the franchisor?
4. Are there any current or pending legal issues faced by the franchisor?
Take the time to talk to other franchisees to get a first-hand account of their experience with the franchisor.
1.9 Franchise Package
During your research, you will also want to take a detailed look at the franchise package to see what is included.
• Are there are licensing or other fees?
• Is a land and/or building purchase or lease required?
• What equipment is needed and/or provided?
• How long is the contract?
• What training is provided?
• What level of inventory is needed to get started?
• What other costs will need to be paid to the franchisor? Royalties, advertising, insurance?
1.10 The Franchise Disclosure Document (FDD)
Once you identify a company that you are curious about, the next step is to request and read thoroughly the Franchise Disclosure Document, or FDD. The FDD defines what the franchisor will do for you and what is expected of you. Each franchisor is legally required to provide this document to potential franchisees.
There are 23 important sections to the FDD.
• Sections 1 through 4 contain information pertaining to the history of the franchisor company, their business experience, litigation, and bankruptcy details (if applicable).
• Sections 5 through 10 outline the fees associated with the franchise, such as initial investment costs, royalties, advertising fees, and all financial arrangements, including restrictions as to sources of products and services.
• Sections 11 through 19 detail the franchisee’s obligations and provisions in the agreement. These are very important, as they define what restrictions there are on products that can be sold, transfer assignments, terminations, and dispute resolutions. This section also includes information about advertising, computer systems, and training.
• Sections 20 through 23 provide a list of existing franchisees, those that are active and those that have left the company. They also provide financial statements of the franchisor and copies of contracts used in connection with the franchise offering, including the Franchise Agreement.
1.11 Personal Assessment
Before you decide to invest in a franchise, you should first ask yourself a few important questions relating to your personal ambitions, goals, and needs.
Consider the following questions:
• What is your experience level?
• What are your abilities?
• What is your education level?
• What are your goals?
• What is your financial situation?
• Do you know how much you can invest?
Remember, this is about you. Focus on the best possible company that will be able to meet all of your needs.
1.12 Advice and Counseling
During this process you should also consider seeking advice from franchise consultants, franchise attorneys, accountants, and other business experts.
• The primary goal of the franchise consultant is to match the needs, skill sets, and business objectives of the prospective franchisee with the right franchise and franchisor. A franchise consultant also helps guide the research process and can offer advice on financing options.
• A franchise attorney will help you review the lease agreement and the incorporation documents, as well as providing relevant legal advice.
• The franchise accountant will help you by reviewing the franchisor’s financials.
• A reliable lender will help secure the financing that best fits your business model.
• And a professional site locator is valuable in selecting and securing the right site for your franchise.
It is important to find organizations and individuals that can guide you every step of the way during your research before you decide to purchase a franchise. Networking with other business owners, Chambers of Commerce, and friends are some approaches to finding help.
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