What type of
business is franchising?
Franchising is not really a type of business but, more
accurately, a method of distribution for both products
and services. Normally, a franchisor which has developed
a particular business system and identified it with a
unique trademark or tradename then licenses the right
to franchisees to use its business system and distinctive
mark in exchange for payments of royalties and other fees.
How
does a franchisor create a franchise system?
A franchise system normally begins with a single successful
business outlet developed around a unique format or concept.
The owner might then establish two or three other outlets
to further test the concept and expand operations. The
owner must then decide, if further expansion is the goal,
whether or not to obtain financing to develop further
company owned outlets or to expand the business by franchising
the concept and trademark to franchisees as independent
business owners.
What
types of business operations have been franchised?
There are generally two types of franchises – product
franchises and business format franchises. Product franchises
include car and truck dealers, gasoline stations and soft
drink distributors. Business format franchises generally
provide services or a combination of products and services
such as restaurants, home or office cleaning, hotels,
fast food outlets, printing and copying stores and clothing
or carpet cleaning operations, to name just a few. Business
format franchisees follow a business format or system
prescribed by the franchisor to deliver these goods and
services to the general public.
How
popular has franchising become?
The International Franchise Association (IFA) has reported
that in the year 2000, franchisors and their franchisees
accounted for $1 trillion in retail sales in the U.S.A.
alone. This sum is said to represent 40% of all U.S.A.
retail sales. Further, there are an estimated 320,000
franchise outlets employing over 8 million people and
representing over 70 different types of businesses. The
IFA further reports that a new franchise outlet opens
every 8 minutes and that approximately 10% of all retail
business establishments are franchise outlets.
What
issues should I consider before purchasing a franchise?
Prior to purchasing a legitimate franchise you will be
provided with a franchise disclosure document know as
a Uniform Franchise Offering Circular (UFOC). The UFOC
is designed to provide you with sufficient information
regarding the specific franchise system so that you can
make an informed decision as to whether or not to purchase
a franchise. Significant issues to consider include:
Do you fully understand the nature
of the business and is it a business you can commit
your time and attention to?
Does the franchisor have a good track
record, do its key people have a good business reputation
and has there been an unusual amount of litigation
between the franchisor and its franchisees?
Are the existing franchisees in the
system satisfied with the support they receive from
the franchisor and are they profitable? IF YOU ARE
NOT READY TO CONTACT A SIGNIFICANT NUMBER OF EXISTING
FRANCHISEES TO OBTAIN THIS ESSENTIAL INFORMATION,
YOU ARE NOT READY TO BUY A FRANCHISE!
Have you calculated the amount of
the initial investment needed to establish the franchise
outlet and how much you will be required to pay in
the form of royalties, advertising fees, etc. to the
franchisor?
Does the franchisor require you to
litigate or arbitrate disputes in a state other than
your own?
Do the franchisor’s financial
statements indicate sufficient net worth to properly
support and operate the franchise system?
What support and training does the
franchisor provide in order to establish my franchise
outlet?
What
state or federal statutes or agencies regulate franchising
and the sale of franchises?
A federal regulation and the laws of some 15 states require
franchisors to prepare a detailed disclosure document
known as a Uniform Franchise Offering Circular (UFOC).
The UFOC must be given to all prospective franchisees
for a specified period of time before a franchisor can
sell a franchise to a prospective franchisee. The UFOC
contains 23 different sections each dealing with a specific
category of information about the franchise system. You
should review each and every one of these sections and
the franchise agreement itself with your attorney and
your accountant as appropriate before purchasing a franchise.
How
do I know I would make a successful franchisee?
A franchisee should obviously be comfortable with the
business of the particular franchise system he or she
is preparing to purchase whether it be preparation of
food, sales of sporting goods or operating an exercise
facility. Further, the franchisee must be comfortable
with the people and methods of the particular franchisor
with which he or she will become associated. Other questions
a prospective franchisee should ask of himself or herself
include:
Am I willing to work long hours and
take financial risk to establish my franchise?
Am I ready to learn the prescribed
franchise system and to operate my business in accordance
with its controls and direction?
Am I the type of person who might
resent the controls and direction of the franchisor
and prefer to make decisions on my own?
Will I be satisfied to operate my
business under the franchisor’s name and image
and offer only the products and services the franchisor
permits?
After a full investigation, I have
selected a franchise that I wish to purchase. What do
I do next?
Presumably, at this point, you have obtained a copy of
the franchisor’s UFOC and have signed a receipt
for it. Your next step, before making any payments or
signing any contracts, is to obtain the advice and counsel
of a lawyer who is familiar with franchising and of an
accountant who can review the cost of your investment
in the franchise and other financial issues. Your franchise
lawyer will review the UFOC, point out any significant
legal issues or concerns contained in the franchise disclosure
documents and answer any questions you might have concerning
your legal duties and obligations and those of the franchisor.
Your lawyer will also provide you with general business
advice regarding the creation of the legal entity which
will operate your franchise outlet, licenses which you
might need, leases, employment issues, etc.
