Savvy entrepreneurs can’t deny the vigor of today’s franchising business model. According to the International Franchise Association®, more than 828,000 franchise establishments were operating in the United States in 2007, accounting for an estimated $2.1 trillion in direct and indirect economic impact.*
Essentially, franchising is a business model that provides an opportunity for a company to expand its brand or market more quickly, with less capital outlay. Franchisors enter into agreements with franchisees, granting them the right to use the franchise’s trademarks and business practices, often with training and support from the franchisor, in exchange for fees and franchisee investment in the business. While the most recognized franchises today are in the retail and food service industries, nearly any proven business formula could work inside this concept.
The Best Potential Franchises
If you are an entrepreneur who’s thinking of growing your business via franchising, do not move ahead until you ask yourself the key question: Is my company a good candidate for this mode of expansion?
Firms that have successfully adopted this model typically share four traits:
- Strong track record: The business is doing well, with sufficient revenues and repeat customers to warrant — and survive — duplication in many locations and circumstances.
- Broad market potential: The demand for the product or service reaches far beyond the community where the business currently operates.
- Clear message and brand: The business has developed a consistent, reliable brand identity.
- Teach-ability: The business owner can effectively educate franchisees on the core business concept, products and services.
The two most common types of franchises are the product distribution arrangement and the business format model.
The product distribution franchise is basically a supplier-dealer relationship and does not generally mandate a standard operating configuration across locations. Soft-drink distributors, automobile dealers and gas stations typically are product distribution franchises.
Besides using the franchisor’s products, services and trademarks, business format franchises also follow franchisor protocols, with common marketing plans and operation manuals. Members of this genre include some of the most popular franchise opportunities, such as fast food chains, retail and grocery stores, hotels and motels, and restaurants.
Why – or Why Not – Franchise?
Franchising is a great way to grow a business for some entrepreneurs; for others, it may not be the right fit. Before deciding whether to go this route, consider the following:
- Franchises offer franchisors quick business growth primarily funded by franchisees.
- Franchisors earn a certain percentage of each unit’s gross profit.
- A franchise system’s expanded network can combine marketing and advertising power, as well as the ability to capitalize on new opportunities.
- Hiring, unit operating expenses and lease arrangements for the new site are typically the franchisee’s responsibility.
- Franchisors incur the expense of legal and regulatory fees, which may be impractical when a company is suited only to limited expansion.
- Franchisors must invest considerable time and resources in the franchising process before realizing a profit.
- Franchisors must set standards for attracting qualified franchisees and systems for closely monitoring all units in their networks.
Because of federal and state laws and regulations related to franchising and business opportunities, franchising a business involves considerable legal groundwork. This is critical, because following the letter of the law also lays the foundation for strong relationships between franchisors and franchisees.
Experts advise hiring an attorney experienced in franchise law prior to starting the paperwork. Two main documents are pertinent to the franchise process:
- The Franchise Disclosure Document (FDD), formerly known as The Uniform Franchise Offering Circular (UFOC), is a regulatory document with information about the franchisor and the business system, which helps prospective franchisees make informed decisions. Typically, it includes details about the franchisor’s key staff, management experience, bankruptcy and litigation history, initial and ongoing costs and fees, training and support, and territory rights.
- The franchise agreement offers specific information about the terms of the relationship between the franchisor and franchisee. While content and format can vary widely, it generally spells out the rights and obligations of both parties, such as system standards, procedures, training, assistance, enforcement, advertising, term, renewal and termination, and fees. Since it is the principal legal document that governs the relationship, both the franchisor and the franchisee must sign this contract.
The Franchise Process
Specific details of the franchise process fluctuate from industry to industry and from business to business – but commonalities do exist. Here are a few of the basic steps in expanding your business through franchising:
- Write a detailed business plan that includes a business history, current market analysis, company vision and financial projections.
- Register your trademark or service mark to protect against infringement.
- Consult with a qualified attorney with expertise in franchising and intellectual property.
- Complete legal documents in a thorough and timely manner.
- Develop a marketing and advertising strategy that establishes a uniform company look and customer experience.
- Write operating manuals and create a standardized training program.
- Establish initial and ongoing support for franchisees, including maintaining continuous involvement and communication.
- Develop a management team to help open new franchises and offer advice to franchisees about site selection.
International Franchise Association
Small Business Administration
The American Association of Franchisees and Dealers
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.