Franchises Overview
Franchises Resources
Franchising occurs when the owner of a business (the "franchisor") licenses the business's trademark, trade name and marketing information to an individual or group (the "franchisee"). The franchisee is responsible for selling the goods or services provided by the franchisor in compliance with a franchise agreement. In exchange for the franchisor's product recognition and business expertise, the franchisee pays the franchisor an initial fee, as well as a percentage of all profits received from the franchise.
There are an estimated 2,500 franchise companies in North America. The largest franchise industry is related to fast food, though franchising is also common in the retail, fitness and hotel industries.
The Franchising Process
- Selecting the Franchise. The franchising process begins when the potential franchisee chooses a franchise to invest in. Because most franchise agreements require a long-term commitment, a franchise must be selected carefully. Potential franchisees should consider the type of industry that best suits their interests, financial needs, schedule and expertise. Those considering a franchise may wish to attend a franchising exposition, which allows individuals to view and compare various franchise opportunities.
- Evaluating the Uniform Franchise Offering Circular. Once a franchise has been chosen, the franchisee must evaluate the history and viability of the franchise. Every franchisor is required by the Federal Trade Commission to complete a Uniform Franchise Offering Circular (UFOC) that discloses detailed information about all aspects of the franchise. This circular must be distributed at least ten days prior to the purchase of the franchise. While specific requirements vary between states, most jurisdictions require the UFOC to disclose the franchisor's business experience and history; patents, copyrights and trademarks owned by the franchise; financial statements and other pertinent financial information; and any restrictions the franchisor wishes to impose on the franchisee.
- Entering the Franchise Agreement. The franchise agreement sets forth the legal rights and responsibilities of both the franchisor and the franchisee. In addition to outlining the franchisor's required standards for quality and service, the franchise agreement typically includes a payment schedule and an arbitration clause.
- Opening the Franchise. The franchisee must pay the franchisor an initial franchise fee. The franchisee must then complete a training program which provides the franchisee with the necessary information to operate the franchise. Typically, the franchise opens in a location selected and developed by the franchisor.
- Cancellation of Franchise Rights. Failure to comply with the terms of the franchise agreement may result in a cancellation of franchise rights or a refusal to renew the franchise agreement.
Benefits and Drawbacks of Franchising
There are a number of advantages to opening a franchise. First, a franchisor provides the franchisee with the tools needed to establish a successful business. The franchisor trains the franchisee and equips the franchisee with a business and marketing plan. While the franchisee is responsible for managing and operating the franchise, the franchisee is not required to make vital decisions regarding product development. Second, by offering a product that the public recognizes and trusts, the franchisee is guaranteed to have a customer base.
While operating a franchise may be a very lucrative and enjoyable venture, there are also several drawbacks to franchising. Opening a franchise is expensive. In addition to making payments to the franchisor, the franchisee must pay for all costs associated with running the business. Despite the franchisee's substantial investment, the franchisee has limited control over the business. A franchisee must comply with the franchise agreement and obtain approval from the franchisor before making vital business decisions.