Some people think a franchise is the best of both new business startups and the best type of business to buy. With a franchise you have a proven roadmap for running a business and guidance by people who are specialists in the specific business you are interested in starting. Some people think a franchise may not be such a good situation - you are required to run the business with substantial restrictions and you will pay a portion of your profits in royalties to the franchisor. Both viewpoints are valid and should be considered if you are thinking of buying a franchise - whether new or a resale.

Understanding the Benefits of a Franchise

There are many benefits to owning a franchise. You get the security of a proven business model, the support of an established company, training on how to run the business, and the strength of a national brand. But there are also other things to consider about owning a franchise, like the costs to start up and the amount of the royalty payments, the risks involved, and what happens if your initial investment doesn't work out. In this article, we'll explore some of the most important benefits that franchises offer and give you some suggestions and questions to ask to increase the odds of making a good decision.

According to The Franchisee Handbook, Approximately 1 out of 12, or 760,000, small businesses are franchises, which supply jobs for over 8 million people, and there are about 4,000 franchisors in the United States. The boom in franchising did not take place until after World War II. Nevertheless, the rudiments of modem franchising date back to the Middle Ages when the Catholic Church made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over to the church. The practice ended around 1562 but spread to other endeavors. For example, in 17th century England franchisees were granted the right to sponsor markets and fairs or operate ferries. There was little growth in franchising, though, until the mid19th century, when it appeared in the United States for the first time.

One of the first successful American franchising operations was started by an enterprising druggist named John S. Pemberton. In 1886, he concocted a beverage comprising sugar, molasses, spices, and cocaine (which is no longer an ingredient). Pemberton licensed selected people to bottle and sell the drink, which is now known as Coca-Cola. His was one of the earliest—and most successful—franchising operations in the United States.

What is a franchise?

If you're considering a franchise, you know there are many benefits to owning one. But what is a franchise?

First and foremost franchises are about brands. The brand is often why consumers buy a product or hire a company. Franchising is a way for almost anyone to open a business and have instant brand recognition and buyer loyalty. A franchise is an agreement between the franchisor (the company that offers the business model) and the franchisee (the person who buys into the business). The best franchisors provide great systems, support, and assistance in order for the franchisee to operate their business successfully.

For example, Subway Restaurants are a franchise. The Subway brand has been around for a long time, and it continues to be successful because of the company model. According to the Subway website, they have over 44,000 locations around the world. Most of these locations are owned and operated by individual franchisees.

The biggest benefit of a franchise is access to a proven business model with a proven track record. If you're looking for stability in your venture, then this type of ownership might be right for you. With franchises like McDonald's, The Maids, Regus office, the UPS Store, and hundreds of others you can rest easy knowing that these businesses will be around for decades to come.

Some franchisors formed the IFA in 1960 to police the franchising industry and eliminate the con artists. Individual states began passing laws to regulate franchise activities. The Federal Trade Commission (FTC) initiated a franchise trade rule in 1979 requiring the disclosure of pertinent information to prospective franchise owners. Franchising became a respectable word again, and the practice flourished, aided by the efforts of early franchisors like Ray Kroc (Macdonalds) and Dave Thomas (Wendy's).

The Federal Trade Commission and each state now have regulations that franchisors must adhere to. Each franchise must file a comprehensive document known as a Franchise Disclosure Document (FDD) which must be given to every applicant that wants to buy a franchise. This document contains a wealth of information on the franchise company, officers of the company, costs to own and operate a franchise, and some financial information about the franchise.

Franchise Disclosure Documents are available from the franchisor and several states that have a public repository for the FDD filings. One of the easier places to lookup an FDD is from the Wisconsin Department of Financial Institutions.

What Are the Advantages of Franchises?

There is an old saying in the franchise realm - "Be in business for yourself but not by yourself." One of the biggest benefits of a franchise is access to a proven business model with a proven track record and a peer group of other owners who are operating the same business as you are. People typically consider franchise ownership when they are not experienced with the type of business being considered and when they want to quickly grow a business from scratch. Franchises are a great option for those who want to start their business without going through the normal startup process.

The franchisor sets up all aspects of the business, including its branding, marketing, human resources system, inventory control, product development, training program, etc. The franchisor also typically offers training on the product, business operations, and marketing for the business.

Here are some of the most important benefits:

• A recognized brand name
• Site selection and site development assistance
• Training for you and your management team
• Research and development of new products and services
• Headquarters and field support
• Initial and continuing marketing and advertising

How much does it cost to start up a franchise?

When you start a franchise, the initial investment can be large or not - depending on the type of franchise you choose. There are generally two categories of expenses you will pay when you start up a franchise. Most franchises charge an upfront initial franchise fee which buys you a license to operate the franchise. The license is usually for a limited time typically ten to twenty years. After the initial period expires, there is usually a renewal fee which will be lower than the initial fee. There may also be fees for training and software.

In addition to these fees, there will be the costs incurred to open the business. These costs vary greatly depending on the type of business. Franchisees need to buy or lease a business location, invest in inventory and equipment, and often hire employees. For many franchises, a large percentage of these costs and fees can be paid using a loan from the Small Business Administration (SBA). The SBA maintains a list of franchises that qualify for financing.

A franchisee must also pay an annual franchise fee and ongoing royalty fees to the franchisor. These costs are set by the contract between the franchisee and franchisor. Often there are also fees for national and local advertising.

What Are the Risks and drawbacks of Franchises?

When you start a business, it's important to keep in mind the risks involved. A franchise is a business model that includes licensing, copyrighting, and intellectual property protection to help protect your investment. There are many risks associated with owning a franchise, which is why it's important for you to consider these things before giving up ownership.

Franchisees are often subjected to tight supervision by the franchisor. They cannot pick out their own business name, buy products and services from whom they choose, or select the location at which they will do business. In addition, franchisees usually must follow franchisor guidelines closely and not deviate from their approach to doing business. For instance, an enterprising Dunkin Donuts franchise owner who perceives that his customers want another type of coffee would be prohibited from offering it.

Franchisees may be required to buy their supplies, software, and equipment from the franchisor or suppliers chosen by the franchisor and these can be more costly than the business owner who could look for a deal. On the positive side, this ensures consistent quality for all of the franchise outlets.

As a franchisee, you will be required to pay royalties and spend a certain amount on advertising, premises upkeep, and marketing and you may not see a return for these expenses. You also will not have the opportunity to cut back on these in difficult times.

You will also be required to sign a non-compete agreement which will last beyond the termination of the franchise agreement - usually 1 - 3 years. So, you may not be able to continue in the same business for a while after closing or selling the franchise in case things are not going well.

Another risk with owning a franchise is what happens if the franchisor's business model doesn't work out? It's possible that you could lose money if not enough customers come in or if you aren't able to reach your sales targets. This requires diligence and thoughtful decision-making ahead of time so that you don't end up stuck with an unsuccessful business model.

Since there are so many different franchises, it is difficult to know what franchise to choose - what will best utilize the strengths of a particular prospective franchise owner. One of the best things a prospective franchise owner can do is to contact a franchise consultant for help with this. The franchise consultant has knowledge and information on hundreds of franchises. In most cases, the consultant is paid a referral fee by the franchisor. The usual fee can easily be in excess of $20,000 if you complete the purchase of the franchise. This is both good and bad since their loyalties may be divided - but their services are free to you.

In addition to utilizing a franchise consultant, there are several franchise expo's which you may want to attend to gather information. One of the largest is the International Franchise Expo in NY. In addition, the Great American Franchise Expo has several locations as well as an online Franchise Expo.

Will you be a successful Franchise owner?

Who makes a good franchise owner? The most successful franchise owners are people who can follow a pre-defined system. Being an entrepreneur is great but some entrepreneurs have a difficult time following the systems, processes, and procedures developed by someone else. To be a successful franchisee you need to have the drive of an entrepreneur but the desire to strive for perfection in the execution of someone else's plan.

If you have a constant desire to change things and try new strategies, you may not be a good candidate for franchise ownership. If you are to be successful in running a franchise you need to be able to live by someone else's rules and not be a rule-breaker. If you can not live by the franchisor's rules you will constantly be battling the franchisor over how to best run the business.

Different franchises require different skills to be successful - sometimes not the ones you think. Some franchises require superior selling skills, some financial and management skills, and others need HR and people skills. In any case, you will need to have the temperament to be in business for yourself. You will need to be able to evaluate and take risks to work as an owner and not as an employee. Most successful business owners, and franchise owners, are the type of people who will do what it takes to be successful - sort the mail, clean the bathrooms, talk to the bank, and hire and fire employees.

Once you decide that you have the temperament to be a franchise owner you should ask yourself some questions to figure out what type of franchise will suit you best - and be brutally honest with yourself when reflecting on these:

• What suits my temperment
• Am I better at sales or administration
• Can I handle rejection
• How do I get along with people
• Am I a leader
• Am I good at management
• Am I good at hiring people
• Can I manage a high turnover, part-time, workforce
• What hours do I want to work
• Do I want an office
• Do I have a particular passion

Should you invest in a new franchise or buy an operating franchise business?

When you decide to open a new franchise location there is always some risk of the unknown. It is not really possible to know how that franchise will do in that location. In addition, when you open a new location for a franchise it takes time to do the build-out and get the initial publicity going - and you start with no cash flow or customers.

If you buy an existing franchise location there is a track record for the business that you can look at. You start with an open location or business with existing customers and cash flow. Of course, if the franchisee was not a good operator you may need to fix the problems and repair the reputation of the franchise in that location. While there are some drawbacks to buying an existing franchise, the overall risks are lower.

Depending on how the business was doing, the cost to buy an operating location of a franchise might be higher or it might be lower than starting a franchise, paying the franchise fee, buying new equipment, and paying for a buildout of the space.

Conclusion

The definition of a franchise is an agreement between two or more people that a particular business entity will pay a franchising fee to the franchising company in return for the right to set up and maintain a franchise business with the characteristics, services, and limitations stipulated in the franchise agreement, under the terms and conditions of the franchising company.

Franchising can provide you with a number of benefits which include:

• The right to sell your franchise to another business or individual at any time
• The opportunity to buy a franchise in your industry or specialty
• A steady stream of residual income
• A business that continues to generate money after you are gone
• A business that is scalable, meaning it can grow with you as it grows
• A team of people to help you manage your business
• A territory that is perfect for your business

Franchising offers people a chance to own, manage, and direct their own business without having to take all the associated risks. This aspect has allowed many people to open businesses of their own who might never have done so otherwise.