Franchising – Benefits and Limits

 

Franchising is a very exciting way for a person to be an entrepreneur while having a very set structure of how to operate the business and back office support from franchise’s parent company. While franchising may allow people to own a business, there are several drawbacks that you may face if you decide to buy into a franchise.

 

First, of course, the legal disclaimer

 

Please note that the information in this article is not to be used as consulting, accounting, or legal advice. The following information is provided with the understanding that this article is not a substitute for professional advice, and is merely for informational purposes. TheFinanceResource.com is not responsible for the use of any information contained below or for the factual accuracy of any statements made below.

 

The Article

 

Franchising is not a new concept, and the roots of franchising can be traced back to the early 20th century. If you were a kid that had a paper route, then you were briefly introduced into the world of franchising. By buying into a franchise, you are purchasing the right to use the business’s concept, operating plans, business plan, logos, and marketing campaigns for your business. In exchange for this right, you will have to pay an initial franchise fee (ranging from $2,500 to $200,000 depending on the franchise), plus ongoing payments (or royalties) to the franchising company. These royalties usually range from five to ten percent depending on the reputation of the franchise and whether or not your royalty payments include marketing support. If you are interested in purchasing a franchise, you should ask the Company to provide you with an up to date copy of their Uniform Franchise Offering Circular (or “UFOC”).

 

This is a legal document that has been usually filed with the state’s securities or corporations department. Each state has different rules regarding the information that must be contained in the circular, and if you are uncertain of the language contained in the UFOC, you should hire a lawyer to help you understand all of the legal jargon. In this document, you will see all of the terms between you and a franchiser, including expected startup costs, the initial franchise fee, the ongoing royalty payments, and other requirements that may be required of you. Many franchises require that a new franchisee attend a training seminar at their corporate headquarters (or other location) before they can begin development of their franchise.

 

For entrepreneurs that do not have much business experience, franchises can provide an easy entry into a new market with minimal risk. Popular franchises enjoy wide brand recognition, and can provide you and your family with a stable investment that will provide you with years of income and financial security. Once you decide to leave the business, you can sell your established franchise for a significant earnings multiple.

 

Many franchisees buy into a franchise agreement with the intent to develop a number of locations throughout their regional area. This is an important fact for a potential entrepreneur because franchiser companies cherish trained people that can develop markets without having to shoulder very much capital risk. When you buy into a franchise, you are accepting the substantial capital risk associated with starting a business in a new market. This capital risk is alleviated through the back office and marketing support provided by the franchising company.

 

Each franchising company provides varying levels of support and marketing. This is also true for the latitude granted to the entrepreneur for making business decisions. Each part of your business has been carefully planned, including the method of operation, approximately salaries to be paid, costs for materials or inventory, pricing of products/services, royalty fees, and your ability to purchase or start additional franchises. Franchisers often grant their franchisees a protected territory, which protects you from having another franchisee start a business in your territory. This is important because it provides with the assurance that you will have exclusive access to your market with the brand name, logos, and products offered through the franchise. Banks are very keen for lending to entrepreneurs. This is primarily due to the fact the risks associated with well known franchises are several reduced because the business concept has been proven, other franchisees have developed profitable businesses using the business models provided by the franchiser, and the brand name is well known among consumers. Many lending institutions have several SBA and traditional lending programs that are specifically geared to entrepreneurs.

 

In conclusion, franchising is an excellent way to acquire or start a new business. The risks of franchising are far lower than that of starting to own your own business. However, there are many drawbacks as well, and it is important to remember that you will not have 100% control of your business. In a sense, you are becoming a manager of a store that you happen to own. You will be required to follow many instructions and you will be bound by an extensive contract that prohibits certain business decisions, regardless of how good they may be. Banks and lenders are very happy to lend to franchised businesses, and if you an entrepreneur with limited experience, the world of franchising may be for you.