Frequently asked franchising questions are here for your convenience. If you have any further questions, contact us here.

How do we define franchising?

When someone franchises, what they do is hand out goods and services. The person who franchises is a franchiser and he or she charges a fee to permit the legal use of his business name. The person who remunerates money or royalty to the franchiser in return for adopting his trade name is called the franchisee.

How can we distinguish between the terms ‘Business Opportunity’ and ‘Franchise’?

Both business opportunities and franchises involve a parent organization whose work is to provide an opening pertaining to their trade to the concerned party. However, franchisers differ from companies running a business in the way they offer their support. Franchisees are completely dependent on their franchisers and have to abide by their rules and regulations, for example adopting their trade name. Business opportunities, on the other hand, have more freedom and are not allowed the privilege of using the company’s name.

Technically, franchises and business opportunities differ in three ways. A royalty of about 6-10% is to be paid compulsorily in the case of franchises, besides the payment of a 2-4% advertising charge for nationwide advertising campaigns. A Franchise Agreement needs to be signed for a period of one decade, which can be extended later to suit the needs of the franchisrr.

Also, the franchiser reserves the right to revoke a franchise in case the terms of the agreement are violated. Though business opportunities have turnkey operations like training, placement and complete inventory support, they will not be granted the free use of the parent organization’s trademark name.

How does a franchiser make money?

Franchising refers to the way of practicing and using another person’s business philosophy. The franchiser gives the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Various tangibles and intangibles such as national and/or international advertising, training, and other support services are given by the franchiser. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. Franchising became prominent after the 1930s with the establishment of electricity and vehicles. In the 1950s, the Interstate Highway system and franchise-based food service establishments grew as well. According to the International Franchise Association, approximately 4% of all businesses in the United States are franchises, with the majority being McDonald’s. Conventionally, a starting fee, which is normally a flat fee, is paid by the franchisee to the franchiser. Franchise is bearing the said flat fee and in addition, opening a unit in one’s local market. Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain in the process. After the brand and formula are carefully designed and properly executed, franchisers are able to sell franchises their brand and formula and expand with the capital and resources of their franchisees, and can earn profits.

How widespread is franchising?

Franchises take a share of approximately 40 percent of sales by all U.S. businesses. In last year’s statistics, $1 trillion in annual U.S. retail sales were lopped up by franchises and 320,000 franchises operated in small business sectors, accounting for 75 of all industries. It gives employment to 8 million people and new franchises are mushrooming every 8 minutes in U.S. In retail businesses, the ratio of franchise to retail outlets is 1: 12. The importance of franchises is reinforced by the inclusion of questions on franchising in the questionnaire of economic census conducted in 2007. It was a practice to include questions on franchising on a small number of forms, mostly in Accommodation and Food Services.

In the 2007 Economic Census, a question on franchising was asked on 81 of the 530 variants of the census form. This data, which will be released in 2011, will give us information on the economic impact of franchising across many industries. While telling about the spread of franchising, the case study of McDonald’s Corporation needs mention as it is among the most successful businesses in the history of franchising. McDonald’s Corporation is the world’s largest chain of hamburger fast food restaurants, serving nearly 47 million customers daily. McDonald’s primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft drinks, milkshakes, and desserts. Each McDonald’s restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporation’s revenues come from the rent, royalties, and fees paid by the franchisees, as well as sales in company-operated restaurants. As of 2007, McDonald’s revenues grew 27% over three years to $22.8 billion, and it had 9% growth in operating income, totaling $3.9 billion.

What should I consider before buying a franchise?

The concept, capital, and management of the franchiser need to be thoroughly scrutinized before the deal is made. The concept here means the capacity of it to work in the competitive market and its ability to earn money. Before investing in a particular franchise system, carefully consider how much money you have to invest, your abilities, and your goals. The following checklist may help you make your decision. Before purchasing the franchise, the type of ownership you are going to have namely by yourself or with partners has to be decided. You should have savings or additional income to sustain you until  your franchise starts making money.

Selecting a franchise, like any other investment, involves risk. When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, likely competition, the franchiser’s background, and the level of support you will receive. Is there a demand for the franchiser’s products or services in your community? Is the demand seasonal? For example, lawn and garden care or swimming pool maintenance may be profitable only in the spring or summer. Also ask yourself, is there likely to be a continuing demand for the products or services in the future? Is the demand likely to be temporary, such as selling a fad item? Does the product or service generate repeat business? What is the level of competition, both nationally and in your community? How many franchised and company-owned outlets does the franchiser have in your area? How many competing companies sell the same or similar products or services?

What can a franchise do for me that I cannot do for myself?

Franchise business can earn you lot of money. FTC’s Franchise Rule requires franchisers to have a reasonable basis for these claims like a lot of money. So it will be better to invest in an existing franchise rather than starting your own. You will get a reputed brand name at no cost, and the success rate in franchising is very high. The training cost is borne by the franchiser, and the cost of advertisement is shared with franchiser. The reach of distribution is high, and you get it at a very low cost. One of the reasons that many franchises have been so successful is that, in franchising, a business synergy is created.

Franchisees that are brought together under one trademark can achieve things that, as individual business people, they could not do. Group advertising, buying power, and the sharing of ideas are some examples of what can happen. The business background of the directors makes their franchise profitable. Professional accountants review the financial statistics of the franchise and certify it as a solid company. Normally, they will be in the business for a long period of time and hence successful. While there are many examples of successful franchises, buying a franchise is no guarantee of success. Each year there are many failures, both on the part of franchisers and franchisees. A franchiser may claim, for example, that franchisees in its system earned $50,000 last year. This claim may be deceptive, however, if only a few franchisees earned that income and it does not represent the typical earnings of franchisees. To be sure, always ask how many franchisees were included in the number.

What kinds of businesses lend themselves to franchising?

Auto service/automotive repair franchise opportunities, including auto repair service, car repair center franchises, oil and lube change centers, transmission repair, brake repair, tune-up centers, car washes, and more are available for franchising. Cleaning (residential and commercial) franchises and business opportunities including home or residential maid services are also available. Top rated computer businesses including computer publishing opportunities, retail computer stores, computer repair, IT and web site services, retail web sites, computer services, and more are also growing. Also check out coffee franchises and espresso franchises. Statistics says there are over 75 industries that contribute to the franchising community. See our list of industries in “Franchises by Industry.”

Last but not least, opportunities to own the perfect business are plentiful in the fast food industry. The case study of McDonald’s must be read before you scan for the opportunities. See “How widespread is franchising?” above for more information.

How can I find a lawyer that specializes in franchising?

Contact the American Bar Association Service Center (American Bar Association | 321 N. Clark St. | Chicago, IL 60654-7598 | 800.285.2221). The American Bar Association publishes a Membership Directory of the Forum Committee on Franchising. Call or write to request a copy of the directory or visit them online.

What kinds of business are out there?

Just about every business type you can think of is out there for you to find. From travel organization and golf cruise companies, to typing organizations and specialty stores. Use the business finder to identify businesses that are suitable for your industry’s category(s) of involvement and investment ability. There are choices to suitable for every need, from the classic retail business to a work at home or part-time business.

Where can I find extra sources of available capital?

There are many places to find funding for a new business. From SBA loans to family and friends, banks, angels and investment clubs, and partners, you will be able to find the funding you need as long as you can supply a valid and well thought out business plan. Some franchisers will even supply funding plans and assistance. Please visit our finance directory and read the article titled “Getting Financed” for more information on where you can find sources of available capital.

How do you explain the success rate for franchise businesses?

A business’ system should supply a formula for operating a very successful business. Typically, operating exit strategies have been systematized and optimized by the time the company is in business and the company should be skillful enough to help businesses with any challenges that may occur. According to the SBA, businesses fail from lack of management consultancy. With hard work, you and your franchiser should be able to refuse and overcome any problems that happen. In surveys, nine out of ten business owners stated that their business was at least somewhat successful.

What is the history of franchising? The word “business” comes from old french, meaning privilege or freedom. In an effort to collect taxes, governments would select particular people to gather fees within a given geographical area. These “collectors” kept a part of the payments they collected and then reduced the balance to the pope. Others say franchising began when the local sovereign bestowed the privilege to hold fairs and business freely. Basically, this was an approval of a monopoly on commercial ventures. This practice took place throughout the middle ages and eventually became part of European common law. Franchising continued to develop throughout history. In the 1840′s, German Ale Brewers granted exclusive rights to particular taverns to sell their brew. In 1851, the Singer Sewing Machine Company granted limited distributorships for their popular sewing machines. The format, language, and contractual agreements are still used as a base for franchising documents today!

Are there any current trends in franchising?

There are many trends in franchising today!

1. Women and minorities are now discovering how well franchising works. Franchising helps break through the walls that prevent many women and minorities from becoming a business owner. Financing is becoming easier to receive, training and business structures are already arranged, and special help (in terms of funding, etc.) is available.

2. International franchising is going through a growth period. Franchisers are accepting the rise of the “international” market. The world is getting “smaller” and the need for products and services is getting larger. People throughout the world accept American products, thus the trend towards going global with business is proving to strengthen the franchising industry and its many companies.

3. Technology is changing the face of franchising and making already energy-efficient business systems almost flawless. From finding prospective businesses to advertising and using extra-nets to communicate with businesses, the world and the franchising industry is a very different and much more energy-efficient place now that we have the internet and other related technology.

Disclaimer: We are not lawyers and are not qualified to provide advice about any franchise law matters, these are only opinions and suggestions from us and other sources around the internet.