A franchise is an independently held business that functions under the brand and business model of a big, typically well-known corporation. The corporation sets many practices and procedures for operations, purchasing, marketing, and other aspects of running the franchise.
Franchise business owners don’t have many of the issues commonly associated with a startup. But they also don’t have total control over decision-making.
McDonald’s restaurants, H&R Block tax preparation offices, and Ace Hardware stores are franchises. The owners of the individual platforms are called franchisees, and the corporations are called franchisors.
How Does a Franchise Operate?
Under a franchise agreement, the business owner pays a franchise fee plus a percentage of income in royalties to the corporation, generally 4% to 6%. Franchisees may also have to kick into an advertising budget and contribute to other everyday expenditures.
Franchisees are usually liable for other expenses such as rent, the facility’s build-out, gear, and merchandise. The initial investment to own a franchise can range from under $10,000 for a home-based business to $2 million or more for a McDonald’s or Pizza Hut franchise.
What Are the Types of Franchises?
Normally, there are two main types of franchises:
- Entire business format franchises: The franchisee acquires the use of the trademarks, reputation (goodwill), trade secrets, copyrights, and marketing and service details of the franchisor. Examples include McDonald’s and 7-Eleven.
- Product distribution franchises: The franchisor disperses a particular product to franchisees, such as vending machines.
Should You Buy a Franchise?
Before you settle on what franchise to buy, you should analyze the background and qualities of the franchise company.
Some questions to ask include:
- What do other franchise owners say about the franchise?
- Does the franchise have name recognition or a good standing (goodwill)?
- What does the franchise offer its franchisees concerning service for issues and inquiries?
- Have there been any lawsuits against the franchiser by a franchisee? What was the consequence?
- What is the required training?
- What are the prospective returns on having that franchise in your area?
What Kinds of Businesses Can Be Franchises?
Fast food franchises might be the best known, but you can find a franchise for just about every product or service, including:
- Hair salons (Supercuts)
- Home repair (Mr. Handyman)
- Auto services (Jiffy Lube)
- Real estate brokerages (Re/Max)
- Learning centers (Mathnasium)
- Fitness centers (Planet Fitness)
- Tools and equipment (Snap-On, Big O Tires)
- Hotels (Hampton by Hilton)
- Shipping services (The UPS Store)
- Home nursing (Home Instead Senior Care)
- Pest control (Mosquito Joe), and
- Dry cleaning and laundry services (Tide Cleaners).
Why Purchase a Franchise?
Buying a franchise has many benefits. A franchise gives you a leg up on the competitor, extracts many of the unknowns of forming a business, and delivers a support system you generally don’t have as an independent business owner.
A franchise is a proven business model with a track record of sales. While you should definitely do your due diligence on the franchisor, the question of whether the business idea works has already been answered for you.
A franchise gives you ready-made name recognition. The franchisor has already spent a lot establishing the company brand and developing a customer base. You benefit from instant consumer recognition and ongoing marketing and advertising aid, though the franchisor might charge an additional fee for these benefits.
As a franchisee, you don’t have to go it alone. Franchisors offer many kinds of aid, including training your workers, a roadmap for the structure and build-out of your facility, inventory oversight, other operational processes, and someone to call if you run into problems or have questions.
As a startup, you would likely purchase your materials at the lowest volume levels, and prices would be higher as a result. But a franchise is supported by the buying capability of the corporation, giving you the most favorable pricing from the start.
What Are the Disadvantages of Franchises?
Owning a franchise puts you in business with both the franchisor and the other franchisees in the organization, so you are not in control of many aspects of the business.
Franchisees manage some aspects of day-to-day operations, like scheduling employees. Still, they are also directed to follow many regulations and guidelines set by the franchisor, including hours of operation, location, facility design, the territory they can serve, and product and service offerings.
Suppose, for instance, you own a donut shop franchise, and your clients are asking for gluten-free donuts. You might not be permitted to make modifications or expansions to your product offerings even if you spot a trend that could mean more sales.
The branding you get as a franchise owner is a major plus, but if something negatively impacts the brand anywhere in the organization, your business might be smudged with the same brush. If there’s a salmonella outbreak in another restaurant in the franchise or the franchisor is implicated in a scandal, it might impact your standing even if your location is not involved.
The franchisor might demand that you purchase inventory, stockpiles, and gear from distinct suppliers, and you won’t be able to take advantage of a better deal if you find one. If you purchase a business or start one from scratch, you get to maintain all your earnings. Nearly all franchise businesses must continue to pay royalties to the franchisor for the course of the franchise agreement.
What Are Other Things to Assess Before You Buy a Franchise?
Your franchise agreement only lasts for a limited time, and the franchisor can choose to terminate the contract when the term is up, or you might be required to make expensive upgrades to renew.
The franchise agreement may also limit your capacity to sell your business. The franchisor may have the right of first refusal or the right to approve or reject a potential buyer.
More On the Franchise Agreement
The franchise agreement is the contract that specifies the relationship, including rights and obligations, of the franchisor and franchisee.
Generally, the franchise agreement provides the following:
- The franchise fee
- Restrictions placed on the business management structure of the franchisee
- The cost of inventory
- The income the franchiser requires and when it will be calculated
- Length of the agreement
- A termination clause upon what circumstance the franchisor terminates the franchise agreement. For instance, some franchisors require that if your franchise does not make a specified income, the franchisee will be terminated.
It is best to have an attorney review the franchise agreement before signing it.
How Are Franchises Regulated?
Many franchise companies are subject to the stringent policies of the Federal Trade Commission (FTC).
The FTC demands, among other things:
- Uniform Franchise Offering Circular: A franchise company is required to allocate a uniform franchise offering circular that includes all legal and financial details about the franchise company to any person curious about buying a franchise.
- Other Disclosures: The franchise company must also deliver the franchise company’s brochure and all potential franchise agreements to the prospective franchisee at either the time of the first meeting, before a fee is paid, or before the deal is signed.
Should I Consult an Attorney about my Franchise Issue?
A business lawyer can help you determine whether you wish to become a franchisee, start your own business or buy an existing business.
An attorney can help you negotiate a franchise contract that best suits your business goals and priorities when entering into the franchise relationship. A lawyer may also help you find legal relief if a party to the franchise agreement does not perform as promised or imposes unreasonable requirements.
