An Introduction to Franchising
An Introduction to Franchising
What is a Franchise?
A franchise is the agreement or license between two legally independent parties which gives:
• 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 to franchisees
Owns trademark or trade name
• Operations and Management
• Advertising and Marketing
Receives Franchise Fees and Royalties
Uses trademark or trade name
Expands the business with franchisors support
Pays Fees to the Franchisor
Common Franchise Terms:
The Franchise Disclosure Document, FDD, is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee
A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.
The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.
The person or company that grants the franchisee the right to do business under their trademark or trade name.
The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.
Trademark or “Mark”:
the marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Advantages of Franchising:
“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 may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily takes years to establish.
A franchise increases your chances of business success because you are associating with proven products and methods.
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
• Grand-opening program
Franchises offer ongoing support:
• National and regional advertising
• Operating procedures and operational assistance
• Ongoing supervision and management support
• Increased spending power and access to bulk purchasing
Disadvantages of Franchising:
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 franchisee 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 to 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.
The FDD includes information about:
• the franchisor
• the company’s key staff
• management’s experience in franchise management
• franchisor’s bankruptcy and litigation history
• initial and ongoing fees involved in opening and running the franchise
• required investment and purchases
• territory rights
• responsibilities of the franchisor and franchisee
• other franchisees in the system with contact information
The franchise agreement includes information about:
• the franchise system, such as use of trademarks and products
• rights and obligations of the parties: standards, procedures, training, assistance, advertising, etc.
• term (duration) of the franchise
• payments made by the franchisee to the franchisor
• termination and/or the right to transfer the franchise