To Be a Franchise or Not to Be….

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When starting a new business, many people toy with the idea of opening a franchised business.

What is a franchise, exactly? Legally speaking, a franchise has three components: 1) license of trademarks and systems, 2) payment of royalties or other fees and 3) significant input by the licensor into how the licensee runs the business.

What does this mean, exactly? The benefits of buying a strong franchise are that the business has an existing strong brand that customers will know and like; the business has tried and true methods; the franchisee will receive extensive training in these methods; the franchisee will receive ongoing operational support and perhaps volume discounts on supplies. The franchisor may help you find a good location and negotiate terms of the commercial lease.

Your success as a franchisee, however, is based on your willingness to work with in the pre-existing system provided by the franchisor, and to help to build the value inherent in the brand. For people who open a business because they don’t want someone telling them what to do, or micromanaging, this may not be a good business choice. For people who have little prior experience running a business, having a framework, methodology and mentor are invaluable.

Another point to consider is that you will pay for the strong brand name and the tried and true methodology. There will be a franchise fee up front and ongoing royalties to the franchisor based on sales. You may have to pay into a communal marketing pool for the brand as a whole, or on a regional basis.

Starting any new business, whether it’s independent or a franchise, is it takes a lot of time, dedication, sacrifice and money. Opening a franchise may be a little easier because the systems have been developed for you to implement, but it will still take time, dedication, sacrifice and money.

Before committing to a franchise, contact every single operating franchise owner in the Franchise Disclosure Document (FDD) and every single franchisee who left the system. Find out what works and what doesn’t. Find out how much training and operational support you actually receive (as in don’t believe everything you read or you are told). Work with an accountant and financial adviser to determine the upfront costs and ongoing overhead costs.  For more information, check out this pamphlet from the Federal Trade Commission.

 

Topics:  Franchise Agreements, Franchise Taxes, Franchises

Published In: Antitrust & Trade Regulation Updates, General Business Updates, Franchise Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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