Franchise Basics

Buying a franchise is a great way to start your own business with the assistance of a recognized brand name, a proven system in place, a higher likelihood of success and ongoing training and support.

What is a Franchise?

A franchise is the agreement or license between two legally independent parties which give:

  • A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
  • The franchisee the right to market a product or service using the operating methods of the franchisor
  • The franchisee the obligation to pay the franchisor fees for these rights
  • The franchisor the obligation to provide rights and support franchisees

The Franchise Agreement states:

FRANCHISOR FRANCHISEE
Owns trademark or trade name Uses trademark or trade name
Provides support:

  • (sometimes) financing
  • Advertising and marketing
  • Training
 Expands business with franchisor’s support
Receives Fees Pays Fees

Franchisees use a franchisor’s product, service and trademark, and the complete method to conduct business itself, such as the

Common Franchise Terms

Business Format Franchise – this type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals.

Disclosure Statement – also known as the FDD or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system.

FDD – the Franchise Disclosure Document (FDD) is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee.

Franchise – a license that describes the relationship between the franchisor and franchisee, including use of trademarks, fees, support and control.

Franchise Agreement – the legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.

Franchisee – the person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.

Franchising – a method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.

Franchisor – the person or company that grants the franchisee the right to do business under their trademark or trade name.

Product Distribution Franchisee – a franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.

Royalty – the regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.

Trademark – the marks, brand name and logo that identify a franchisor which is licensed to the franchisee. 

What are the advantages and disadvantage to owning a franchise?

Advantages

  • “Owning a franchise allows you to go into business for yourself, but not by yourself.”
  • A franchise provides franchisees with a certain level of independence where they can operate their business
  • A franchise provides an established product or service which already enjoys widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily take years to establish.
  • A franchise increases your chances of business success because you are associating with proven products and methods. (According to the Small Business Administration, less than 5 percent of all franchise units fail each year, compared to 30 to 35 percent failure rate among independent small businesses.)
  • Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement.
  • Franchises offer important pre-opening support:
    • site selection
    • design and construction
    • financing
    • training
    • grand-opening program
  • Franchises offer ongoing support:
    • training
    • national and regional advertising
    • operating procedures and operational assistance
    • ongoing supervision and management support
    • increased spending power and access to bulk purchasing.

 

 

Disadvantages

 

  • The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchise agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee.
  • In addition the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.
  • Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business.
  • A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem.
  • The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.

Englewood, New Jersey

Phone: 800.571.1089

 

Mobile: 908.770.6620

 

Fax: 201.773.1555

 

info@thefranchiseprofit.com

 

About Us

The Franchise Profit is a franchise consulting company dedicated to advising and guiding clients in finding the right franchise to meet both their personal and professional objectives.

Our Services are performed at NO COST to you. We function solely as Executive Recruiters for the franchise industry.