Franchising is a long-term cooperative relationship between two entities—a franchisor and one or more franchisees—that is based on an agreement in which the franchisor provides a licensed privilege to the franchisee to do business. The franchisor grants the franchisee the right to use a developed concept, including trademarks and brand names, production, service and marketing methods and the entire business operation model, for a fee. The franchisee then provides the time, capital, and desire to utilize the brand and services provided by the franchisor to build a thriving business.

The product, method or service being marketed is usually identified by the franchisor's brand name, and the holder of the privilege (franchisee) is often given exclusive access to a defined geographical area for a defined period of time, all of which is defined in the Franchise Agreement.

Franchise:

A privilege or right officially granted to offer specific products or services under explicit guidelines at a certain location for a declared period of time.

Franchise Agreement:

The legal document between the Franchisor and the Franchisee that governs the relationship between the two entities for a specified period of time. It frames the relationship in a concise manner.

Franchisee:

A person or entity to whom the right to conduct a business is granted by the franchisor or licensor.

Franchisor:

The company owning/controlling the rights to grant franchises to potential franchisees.


Franchising is a wonderful way to go into business for yourself - without being out there all alone. Once you find the business you'd like to run, you'll find support from the franchisor every step of the way. You don't have to be an expert at site selection, build-out, inventory selection or marketing because the franchisor can teach you all you need to know.

But franchising is not for everyone. The following articles can help you determine if you have realistic expectations of franchising and if you'd make a good franchise. Successful franchisees generally fall into certain categories. They are comfortable with moderate risk, they are willing to follow the system and rules that pertain to their franchise company, and they enjoy the challenges of starting a new business. These franchisees are enthusiastic, good with people, and are willing to work the hours necessary to get the business up and running smoothly.

Similarly, there are characteristics of successful franchise companies that you should be aware of when doing your research. Do they have a track record of success? Are their franchisees successful and happy? Will they provide all the support you need, both now and in the future? You'll want an emphatic "Yes" to these questions before you put them on your short list.

Putting an ideal franchisee candidate together with the ideal franchise company is what makes franchising work so well. Be sure you thoroughly understand your own needs/desires and your business style as well as culture of the franchise company you want to own before you make any final decisions.

Advantages and Disadvantages of Franchising

To understand the advantages and disadvantages of owning a franchise business you need to have a basis for comparison. Other ways to realize your dreams through business ownership include buying a business opportunity and creating a business from the ground up. There are definite advantages and disadvantages to owing a franchise business over these other career or business ownership options but to know which path is right for you, you should first look at your motivations and qualifications for business ownership.


Let’s consider three scenarios:

Scenario One

You have been laid off from a 20-year career in banking. Even before the layoff, you realized you had reached the ceiling on your salary and possibilities for advancement in your career had diminished. Your company has given you a cash settlement and you are keen to take charge of your life, become your own boss and learn some new skills along the way. You want a good income and are willing to put in whatever hours necessary to jump start the new career but your overall goal is to eventually work reasonable hours and have more time for yourself and your family.

If your history is similar, you are probably an excellent candidate for franchise ownership. This path will allow you to benefit from a proven system of operations and a training program that will quickly get you up and running. As you have no previous business ownership experience, the ongoing support you will receive from a franchisor will be vital to your success. Many franchise opportunities offer a turnkey package that will include almost everything you need to start your business. In addition, most franchisors require no previous experience in their industry so you can be open to a variety of types of businesses and won’t need to stick to the one industry you know.

Franchisees can take advantage of lower cost materials due to group buying power. They also learn from each other and usually form a peer support system. Because you won’t be occupied with every minute detail of owning a business as you begin down the path of franchising, you will be able to concentrate on growing your business.

One disadvantage to franchise ownership is that you must follow a franchisor’s rules. In other words, you are in charge as long as you follow and adhere to all of the elements of the franchise system. This is necessary so that the franchisor can offer consistency across the brand – and let’s face it, they’ve done the research and tested the procedures so their way is usually the right way. This is also a benefit to the consumer who can expect comparable quality products or services no matter which franchisee he patronizes, anywhere across the country or around the world.

The other perceived disadvantage is that a franchisee must pay royalties and sometimes a marketing fee to the franchisor. Royalty payments are compensation for everything the franchisor provides, including access to the brand, the operating system and related items. The franchisor uses the marketing fee to provide national advertising to build the brand and drive market penetration at a greater level than a franchisee could do on his own. Also, national marketing funds enable franchisees to benefit from professionally produced marketing materials and realize efficiencies from commingled funds.

Scenario Two

As a truly entrepreneurial individual, you are brimming with ideas for new products or businesses and love to “tinker” with things until they are just as you want them. You are strongly attracted to the idea of being your own boss and don’t like the idea of answering to others. You have the drive to follow through on your plans and have a background in a variety of disciplines, including sales, marketing, accounting and management, so you are not looking for outside support. You have plenty of money to spend on researching and developing your product/service so a predictable timeframe for break even isn’t a concern.

If you are like this type of person, one who likes blazing his own trails, franchise ownership is not for you. Instead you will be more comfortable setting up your own business using your own ideas. This is the most risky way to become your own boss because you will not have the proven operations system, nationwide brand and marketing, and the ongoing support of a franchise company. You may also have more difficulty obtaining business loans and the time from inception to when you start turning a profit will be hard to predict. On the plus side, you will owe no royalties and can run you business just as you please.

Historically this is the model least likely to succeed on average so it is recommended only for truly exceptional individuals who have the desire and stamina to start their own business based on their own unique idea or approach.

Scenario Three

A varied work history has given you some great skills which you wish to put to use running your own business. You are not concerned about the type of business you buy but want to have freedom to run it your way. You would be okay with a certain degree of risk but also recognize the advantages of an established system of operations. Marketing assistance and training, however, may be under developed or nonexistent. Although you don’t have a lot of cash to invest, your spouse works so you will have income for the time it takes your business to begin making money.

If you’re the type of person who will never stop and ask directions, a business opportunity may be the right type of business for you. This is a business you buy outright and have the freedom to run your own way. The benefit of a business opportunity is that they generally provide you with a successful business model and possibly some training, and marketing assistance. The initial investment is usually lower than for a franchise and there are no ongoing royalty payments.

A downside to business opportunities is that the seller isn’t invested in your success or failure because he makes all of his money up front. Therefore, you won’t have extensive ongoing training, assistance, a national marketing program, research and development, etc. The risk factor is probably greater than for owning a franchise but could be less than starting your own business.

Which business ownership path is best?

The answer to this question is as unique as each individual. For many people, franchising has proven to be a viable way to become a business owner. For the most part it offers the lowest risks and the highest level of support. Because a franchisor doesn’t succeed until the franchisees do, you’ll find a team of dedicated professionals willing and able to help you every step of the way, from site selection to employee hiring to grand opening. They will keep in touch with you from the very beginning to years down the road and have web sites, toll free numbers and dedicated staff to make sure all your questions are answered quickly.

The cost of this continued support is usually in the form of royalty payments based on earnings but most franchisees feel the benefits are worth the expense. Research and development is possible because of feedback from those in the field and this cooperative involvement is a hallmark of a well-run franchise business.

The final benefit of franchising is that you buy a package – product or service, brand name and trademarks, marketing and advertising, operations manuals and proven systems – along with thorough training in every aspect of the business. You can totally change careers without years of schooling or apprenticeship or research. One day you can have a “job” as accountant or police officer and a few months later have a “career” as the successful owner of a business, which may be an auto detailer or a pet spa or a home improvement franchise.

However, if you have the initiative, patience and drive to start a business and if you have sufficient finances and enough business experience to go it alone, your best path may be to purchase a business opportunity or to start your own business. This is especially true if you are someone who would not be willing to follow a franchisor’s system.

The most important component is not the business itself but what you bring to the business. So follow whichever business ownership path fits you and enjoy being your own boss!

links for more information: Franchising info PDF - www.franchise.org