Franchise Articles

Posted on Jun 24, 2011

What is a Franchise? The FH Franchise Primer

Contrary to popular opinion, franchising extends far beyond food and retail. In recent years, franchises have become popular for the services sector and manufacturing sector as well. The US Census shows that in 2007, franchises alone accounted for $1.3 trillion of sales.

Franchising in its rawest form can be broken down into 2 specific categories:

Product/Tradename Franchising

This is a business in which the franchisee is required to sell the goods produced or under the control and management of the franchisor. The franchisee has limited flexibility. The franchisor controls the operations significantly but in return the franchisee can look forward to a greater extent of assistance from the franchisor as well.

Payment options for franchisees in this kind of relationship usually entails them to purchase the trademarked goods from the franchisor or a payment of an initial franchise fee. The franchisee pays the franchisor for the right to distribute their goods.

Automobile dealerships are a perfect example of product/trademark franchising.

Business Format Franchising

Business Format Franchising is the most popular form of franchising as most fast-food and eating franchises follow this format. Pinkberry, Holiday Inn, Dunkin Donuts, Century 21 and other popular brand names are examples of business format franchising. This format is differentiated from product franchising in the sense that the franchisor licenses to the franchisee the use of an existing business system used by the franchisor and associated with the franchisor’s trademark. The franchisor usually provides significant assistance to the franchisee, such as: furnishing the establishments to maintain a certain “look and feel”, and guidance in marketing and systems to avoid branding dissonance. The franchisee must adhere to the controls placed on him and operate under the guidelines of the franchisor’s business system.

The Business Format Franchise appears more mutually beneficial. Paying an initial fee and an ongoing royalty fee provides the franchisor with a continual supply of working capital while the franchisee can launch a successful business. The returns to the franchisee take place in the form of an existing brand identity, guided marketing outlines and promotional materials, existing financial models, greater cost benefits and the benefit of being affiliated with the franchisor’s collective purchasing power.

Once potential franchisees understand the type of franchise they are buying into (see above), he or she must consider other critical points such as: Would i function well as a franchisee? What kind of working hours would I be required to commit? How long is the franchise lease term? In other words: how does one go about buying a franchise?

Buying the Franchise

Understand that franchising does not hand over the rights of a brand to a buyer, instead it is a leasing arrangement. The franchisor allows the franchisee to work with them for a specified duration of time. Therefore, it is very important for the franchisee to have their legal consultant look into their agreement before signing up.

Know the Franchise

Understand why the parent company has decided to franchise. Every company deciding to to do so looks forward to improve the company’s image as well as the increase of more capital and earnings. To begin, the franchisors' responsiveness can indicate the relationship it shares with its clients. A delayed and lazy response can imply disorganized management and/or a lack of interest.

The information packet usually contains a detailed brochure regarding the business and a questionnaire which is meant to probe into the qualification of the possible franchisee. The questionnaire usually asks for information regarding:

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

After answering all these questions and conducting a thorough investigation regarding the chosen franchise, have the courage to launch the business there after.

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