Frequently Asked Questions

What is franchising?

The word "franchise" means privilege or freedom in old French. In medieval times -- lords or members of nobility would grant the right to hold commercial activities or to hunt on his land. This notion extended to the kings granting a franchise for all kinds of moneymaking activities such as operating a ferry, building toll roads, or brewing ale. Under the auspicious of the king, individuals were given the right to monopolize various activities. Ultimately, these commercial franchise ventures become a part of European Common Law.

In the United States, the I. M. Singer Sewing Machine Company started granting distribution franchises for their sewing machines in 1851. Singer also pioneered written franchise contracts similar to contemporary franchise agreements. By the 1880's cities and municipalities began to issue franchises for utilities for water, sewerage, gas, electricity and streetcar companies. By the turn of the century, companies involved in automobile manufacturing, oil refinery and soft drink bottling began to grant the right to distribute and sell their products.

The contemporary franchise business model is a way of distributing goods and services. There are two basic participants in the franchise system. The franchisor who issues the right to use his trade name, logo and business plan and the franchisee who pay an initial fee and a royalty free for the right to use the name and business plan of the franchisor. In most cases, the franchisor also provides complete training and support of the franchisee.

What are some of the benefits of the franchise business model?

If you want to be your own boss and start your own business ... there are some definite advantages to franchising. In fact, according to statistics by the US Department of Consumer Affairs, franchise opportunities have over a 90% success ratio. There is a higher likelihood of success since a proven business formula is in place. The products ... services ... and business operations have already been established. This is just one advantage, some more are outlined below:

Training

Franchise companies usually provide extensive training and support to their franchisees in effort to help them succeed. They want you to be able to run the franchise profitably. In essence, your success is their success.

Brand Awareness

The corporate image and brand awareness is already recognized. Consumers are generally more comfortable purchasing items they are familiar with and working with companies they know and trust. A well known trademark, either regionally or nationally, and its cumulative goodwill is also a definite advantage. It saves the business owner the cost of creating and advertising a name that customers already recognize.

Proven Business Plan

Franchises have an established business framework ... minimizing the startup problems and guesswork involved in starting a new business. With a franchise, proven successful operating methods and procedures have already been researched, tested and established. Via years of experience, franchise companies know what works and will teach you their formula for success. In essence, when you buy a franchise ... you are buying a proven business plan for you to operate in your own territory.

National Advertising Programs

In addition to on-going sales and marketing assistance, franchisors have a proven, existing and successful advertising system. In addition to a well established brand, most franchise companies support their franchisees with both local and national advertising and promotions to help drive sales.

Support Systems

One of the major benefits of a franchise is their continuing support for their franchises and franchisees. From new training methods ... to system upgrades ... to new products or product enhancements ... to dedicated representative, successful franchise companies are constantly looking for ways to improve their business model and strengthen franchisees and consumer loyalty.

Support also comes in the form of research and development. Most franchisors research and look into vital information such as competition, product demand, seasonal variations, and community attitudes.Site selection and business support are also vital. The savvy franchisor helps with selecting a suitable site location, building construction design and supervision, employee training and operational support.

What factors should I consider when selecting a franchise?

You have made the decision to become your own boss and go into business for yourself. If your business plan involves buying a franchise, you will need to make some very important business decisions ... before you sign. To make the correct decision, you need to objectively evaluate the franchise opportunity and you own skills and level of commitment.

This checklist can help you assess the franchise you are interested in before you make the investment decision. Remember, it is far easier to prevent a problem than to try and fix the damage afterwards. Before buying a franchise you need to consider the following:

• Is this the right opportunity for you? Evaluate your skills, strengths and weaknesses when deciding to buy a franchise.
• Get professional advice from an accountant, lawyer or other business expert who has experience in franchising before making any commitment.
• Get and verify as much information about the financial details of the business as possible. Analyze the profit and loss statement and any annual reports that may be available.
• Read the disclosure document and franchise agreement very carefully -- do not sign anything without reading and understanding it first. If you don't understand any document or any aspect of the document seek independent, expert advice before signing.
• Insist on written representations from the franchisor. If the franchisor is unwilling to back up in writing any oral representations take that a warning sign.
• Make sure you fully understand all the fees payable under the agreement, including what they are, how they are established and when fees are due.
• Find out as much information as you can about the franchise. For instance, has the company ever been the subject of a court action?
• Ask the franchisor for a list of existing franchisees, so you can speak to at least three to four current franchisees. This will enable you to test such matters as the accurate of the disclosure document, earning predictions and profitability, franchisor support and day-to-day operational requirements. Ask the franchise company for statistics relating to success rates.
• Make sure you have everything needed to run the franchise. Ask about the specific requirements needed to operate the business. Do you need a license or special skill? Find out about training and the level of support the franchisor provides at the early stages of the business.
• If there is a lease involved make sure you understand the terms and your rights and obligations under that lease agreement. Will the lease be in the franchisor's name? What are your options when the lease expires? Be sure you are provided a copy of the lease.
• Is the franchise granted for a specified period of time? What is your position at the conclusion of the franchise period? Are you able to negotiate an extension? Be sure you have an exit strategy should the franchise agreement not be renewed.
• Make sure you are appropriately funded. A lack of capital could turn all of your early expenditures into a complete waste.
• Meet the key management figures of each franchise company. This is especially important for smaller franchise companies. Take the time to get to know both the company's executives and their field representatives.

What are some franchising pitfalls to be aware of?

A reputable franchisor will be not only likely ... but willing to be open and honest with you. However, you should be extremely wary of those franchisors who:

• Are reluctant to provide any information in writing.
• Are reluctant to give details of the other franchisees within their system.
• Require full up-front payment for the business to be made before any information is released.
• Claim that you can make large amounts of money quickly and with little effort -- that is, it looks too good to be true.

What is the Disclosure Document?

The Federal Trade Commission mandates that sellers of franchises and other business opportunity ventures to provide prospective investors with the information they need to make an informed investment decision. The Disclosure Document includes 23 vital topics concerning the franchise company and their franchise system, they include:

• Item 1: The Franchisor, its Predecessor and Affiliate
• Item 2: Business Experience
• Iem 3: Litigation
• Item 4: Bankruptcy
• Item 5: Initial Franchise Fee
• Item 6: Other Fees
• Item 7: Initial Investment
• Item 8: Restriction on Sources of Products & Services
• Item 9: Franchisee's Obligations
• Item 10: Financing Available
• Item 11: Franchisor's Obligation
• Item 12: Territory
• Item 13: Trademarks
• Item 14: Patents, Copyrights & Proprietary Information
• Item 15: Obligations to Participate in the Actual Operation of the Franchise Business
• Item 16: Restrictions on What the Franchisee May Sell
• Item 17: Renewal, Termination, Transfers & Dispute Resolution
• Item 18: Public Figures
• Item 19: Earnings Claims
• Item 20: List of Franchise Outlets
• Item 21: Financial Statements
• Item 22: Contracts
• Item 23: Receipt

How can I evaluate my potential of being a successful franchisee?

The advantages of the franchise business model are many, but how can a potential franchisee know if this is the right opportunity for them? It all starts with a serious and honest appraisal of one's own skills set, abilities and practical experience. Some of the characteristics of successful franchisees include: creativity … personality … the ability to follow the franchise company's business plan to the letter … and a strong desire to succeed. A successful partnership between a franchisee and franchiser involves a mutual understanding of each other's objectives and goals.

Each franchise business is unique and requires a different level of commitment and abilities. For instance, a consulting franchise that you can operate out of your home will not require the effort of a busy, fast food outlet. Before committing to any franchise opportunity, review your qualifications for this field in six critical areas:

1. Does your level of education equal the requirements of the opportunity?
2. Do you have the ability to learn and follow an established business plan?
3. Will your professional background match the level of experience needed to successfully run the business?
4. Do you have the ability to secure the financing needed to invest in the opportunity?
5. Are you physically fit and able to run the business?
6. Does your family support your decision to be your own boss?

What do I need to know when shopping for franchise?

You definitely need to know what type of franchise best suits your financial situation, your business experience and your personal goals. To determine what kind of business is right for you ask yourself these questions:

• Have you ever thought about working in this business before?
• Can you see yourself doing this kind of work for the next twenty years?

If you are interested in a particular franchise opportunity study their material and talk to their representatives … and be sure to ask them:

• How long has the franchisor been doing business?
• How many franchised outlet current exist?
• How franchise units are company owned and operated?
• What is the franchise fee and estimated start-up costs?
• What is the royalty fee? What is the advertising fee?
• What training do they provide?
• What is expected of the franchisee?

Avoid high pressure sales tactics. Legitimate franchisors with a successful business plan don't need these tactics and won't use them. In fact, a successful franchisor will expect you to compassion shop and fully investigate their opportunity. They will also be very receptive to answer your most challenging questions.

Most importantly, do not sign a franchise contact until you fully read and understood the disclosure document which the franchisor must provide under Federal Trade Commission's Franchise Rule.

How much money can I make with a franchise?

Ultimately, this is what it's all about. You are going into business to generate revenue and income for yourself and your family. Some franchisors will tell you how much money you can earn if you invest in their franchise system. They may tell you what current franchisees in their system are generating. Be careful what people tell you … be sure to get it in writing! The Federal Trade Commission requires that if franchisors (or any business opportunity that costs more than $500.00) make claims about how much money you can make they need to provide you with written substantiation. You must obtain written substantiation for any income projections, or income stated, or profit claims. If a franchisor does not have written substantiation concerning potential earnings, or refuses to provide it to you, consider their claims as false.

Before I buy a franchise where can I find more information?

Investing in a franchise - or any business venture -- is a serious undertaking. You need to fully investigate the franchisor thoroughly. Take time to speak with current and form franchisees about working with the franchisor. In addition to carefully evaluating the company's disclosure document, you should consult with the following:

Better Business Bureau

Consult with the Better Business Bureau (BBB) in the cities where the franchisor has its headquarters. Inquire about consumer complains about the company, products, services and personnel.

A Franchise Lawyer

Before signing any agreement or document, you need to be sure your attorney reviews it and you fully understand what you are signing. Franchise contacts are complex. A contract problem that comes up after you have signed the document may be impossible or very costly to fix. Your attorney will help you understand all your contractual obligations.

An Accountant

The services of an experienced accountant are invaluable when reviewing the franchise company's financial statements. Also an accountant can provide guidance in picking a franchise opportunity that best fits your personal financial situation and your future income goals.

Banks & Financial Institutions

You will need to work with these organizations to obtain financing. What's more, your banker should be able to secure a Dun & Bradstreet report or similar financial reports on the franchise you are interested in buying.

Government Departments

Several states regulate the sale of franchises. Consult with your state Division of Securities or Office of Attorney General for more information concerning your rights as a franchise owner in your state.

Federal Trade Commission (FTC)

The FTC is an excellent source of information - especially business guides, rules and alerts -- that may be of interest to you as a potential franchisee. Their website is www.ftc.gov.