Franchising Formats

With franchise businesses responsible for almost one-half of all retail sales in the United States and sales totaling close to one trillion dollars by the end of 2000, franchises are difficult to escape.  You may patronize a variety of franchised businesses without even realizing that they are franchises. Franchised businesses run the gamut from car servicing and financial services to yogurt and voicemail. 

Many people are not aware that there are two types of franchises:

· Product / Tradename Franchises
· Business Format Franchises

In Product / Tradename Franchises, the franchisee has use of a product or trade name but has no supporting relationship with franchisor. This means that the franchisee basically operates the business independently but the franchisee does benefit from the marketing and advertising efforts of the franchise system.

The products which are franchised are generally the older, established ones with a proven customer base. The most common product and trade name franchises are auto dealerships, gas stations, and soft-drink bottling companies.

The Business Format Franchise is faster growing and is the format most people are interested in today. It is characterized by an ongoing business relationship between franchisor and franchisee. The franchisee is offered not only a trademark and logo but also a complete operational system. Business format franchises are famous throughout the world with participants such as McDonald’s, Holiday Inn, Midas, Century 21 and Baskin-Robbins, to name a few.

In the best of all worlds, the business format franchise is mutually beneficial, for both the franchisor and the franchisee. The franchisee, by paying an initial fee and, often, an ongoing royalty fee, gives the franchise system a continuous supply of working capital to develop and expand the organization. In turn, the franchisee gets a business package which would take years to develop and refine.  This gives the franchisee a strengthened ability to compete through the established brand identity and marketing power of the system, and the cost benefits and clout of the franchisor’s collective purchasing power.

Buying a Franchise

Now that you’re excited about franchise opportunities, there is something you need to know that may disappoint you: You cannot "buy" a franchise. In actuality you are engaging in a "leasing" transaction.

Why is it a lease? In any franchise deal the franchisee receives the assets upfront but only for a limited period of time--the term of the franchise agreement. The term of the agreement may run 5 or 10 years or, in some cases, only 1 or 2 years. At the end of the term, the franchisor decides whether or not the agreement will be renewed.  The reasons for not renewing the agreement should be completely spelled out in the Uniform Franchise Offering Circular and franchise agreement

The fact that you are leasing and not purchasing a franchise may or may not influence your decision to become a franchisee, but this distinction must be kept in mind during the analytical, negotiating, and agreement processes. There are other important considerations as well:

Step 1: First, you must determine if you would function well as a franchisee.
 
 
Step 2: You then have to choose the right franchise among the 3000-plus franchise selections available. That’s only the beginning. 

Step 3: After you narrow down your franchise choices, you must then thoroughly investigate each opportunity.

Investigate Franchise Systems 

After your preliminary research, you’re going to contact the franchise systems you’re interested in. You will receive an information package from each company. By the way, this is a good way for you to begin to evaluate the franchise.  You might want to think over whether or not you want to pursue this particular opportunity if it takes a month or more to receive the information or if you can’t even get to this point because all you do is leave voice mail messages for the franchise development department.

Generally, a franchise information package will contain a letter, a brochure describing the business and a qualifying questionnaire. The questionnaire usually asks for the following information:

· Assets
· Liabilities
· Net Worth
· Sources of Income
· Educational History
· Previous Employment
· Credit References
· Personal References
· Motivation for Buying a Franchise

Step 4: Once you have made a choice you must analyze and understand the franchise agreement and, if possible, negotiate points of disagreement with the franchisor.

Step 5: Finally, you will have to put together a financial package to fund your franchise investment.

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