FAQ - Frequently Asked Franchising Questions
- What’s the difference between a Franchise and a Business Opportunity?
Franchises tend to offer their franchisees more support and the use of a trademarked name. Franchises also tend to be more strictly controlled by the franchisor. Business opportunities, on the other hand, don’t receive as much support from the parent company, aren’t offered the use of trademarked names and products, and tend to be independent of the parent company’s operational guidelines.
There are also three major legal differences between a franchise and a business opportunity.
- Franchises always collect royalties on all your sales. This amount will vary greatly, but tends to range from 6% to 10%.
- Most franchises also collect an advertising fee that covers national advertising campaigns. This fee also varies but typically ranges from 2% to 4%.
- Franchises also always have a Franchise Agreement. The term is typically 10 years and renewable thereafter, but this time period can vary, depending on the franchisor. If the Franchise Agreement is broken by the franchisee, the franchisor has the right to “take back” the franchise.
There are, however, business opportunities that are turnkey operations, similar to a franchise opportunity. You will receive everything you need, from training, to help finding a suitable location and a full start-up inventory. Unlike a true franchise, you will not receive a trademark and your business will not be considered a trademarked outlet for the parent company.
- What is franchising?
Franchising is a way of distributing products or services. There are at least two levels of people involved in the franchise system. The franchisor, who lends his business system or trade name. The franchisee, who often pays an initial fee and sometimes a royalty for the right to use the name and business system of the franchisor.
- How does a franchisor make money?
Typically, a franchisor sells the right to a franchise for an initial flat fee called the "franchise fee". This fee is in addition to the actual costs associated with opening a franchise unit in one's local market. Then, the franchisor will often receive ongoing payments, such as royalty fees, taken as a percentage of sales. Many franchisors will also sell supplies and/or services to their franchises.
- How widespread is franchising?
In 2000, sales by franchises accounted for more than 40 percent of sales by all U.S. businesses. Analysts estimated that last year, franchises accounted for more than $1 trillion in annual U.S. retail sales and that there were 320,000 franchised small businesses in 75 industries. Industry analysts estimated that franchising employs more than 8 million people and that a new franchise opens up every 8 minutes somewhere in the U.S. Also, approximately 1 out of every 12 retail businesses is a franchised business. (Statistics provided by the International Franchise Association)
- What should I consider before buying a franchise?
The IFA recommends that you consider and investigate the following before buying a franchise: 1. The level of experience required to own and to operate the business. 2. A complete understanding of the business you plan to buy. 3. The hours and personal commitment you will have to give in order to run the business. 4. Learn as much as you can about the franchisor, the company's past successes/failures, and the business structure. 5. How are other franchisees doing? 6. How much will you have to pay to open up your franchise? 7. Will there be continuous fees or royalties? 8. Will you have to buy any products or services from the franchisors? 9. Learn the terms and conditions under which the contract can be renewed or terminated. 10. Check out the financial condition of the franchisor and its system.
- What can a franchise do for me that I cannot do for myself?
Buying a franchise means that you are buying into a functioning and proven business model. There is a significantly lower rate of failure for franchisees than for entrepreneurs with original business concepts. Almost 80% of new business start-ups fail each year, but with a franchise you will be buying into a proven and successful concept. Additionally, many franchises profit because the items/services they sell already have a name and a reputation behind them.
- What kinds of businesses lend themselves to franchising?
What business isn't suitable for franchising? Very few! There are over 75 industries that contribute to the franchising community. From fast food to advertising and home cleaning to hotels, the list is limitless and the opportunities to own the perfect business are plentiful. This Franchise Solutions' site is the perfect place to find the right business to match your interests.
- How can I find a lawyer that specializes in franchising?
Contact the American Bar Association Service Center 750 North Lake Shore Dr. Chicago, IL 60611 312-988-5522
The American Bar Association publishes a Membership Directory of the Forum Committee on Franchising. Call or write to request a copy of the directory.
- What kinds of franchises are out there?
Just about every business model you can think of. From travel agencies to golf cruise companies and from modeling agencies to specialty stores. Use the Franchise Finder to identify businesses that match your industry category(s) of interest and investment level. There are choices to match every need, from the classic retail business model to a work at home, part-time opportunity.
- Where can I find additional sources of available capital?
There are many places to find funding to buy a franchise. 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 provide a valid and well thought out business plan. Some franchisors will even provide funding plans and assistance. Please visit our Finance Directory and read the article "Getting Financed" for more information on where you can find sources of available capital.
- How do you explain the success rate for franchised businesses?
A franchise's business system should provide a formula for operating a successful business. Typically, operating strategies have been systemized and optimized by the time the company is franchised and the company should be able to help franchisees with any challenges that occur. According to the SBA, businesses fail from lack of management skills. With hard work, you and your franchisor should be able to avoid and overcome any problems that occur. In surveys, nine out of ten franchise owners stated that their business was at least somewhat successful.
- What is the history of franchising?
The word "franchise" comes from old French, meaning privilege or freedom. In an effort to collect taxes, governments would select certain people to gather fees within a given geographical area. These "collectors" kept a portion of the payments they collected and then remitted the balance to the Pope. Others say franchising began when the local sovereign bestowed the privilege to hold fairs and trade freely. Basically, this was an endorsement 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 certain taverns to sell their brew. In 1851, the Singer sewing machine company granted limited distributorships for their famous sewing machines. The format, language, and contractual agreements are still used as a model for franchising documents today!
- Are there any current trends in franchising?
There are many trends in franchising today! 1. Women and minorities are discovering that 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 structure are already arranged, and special help (in terms of funding, etc.) is available for minorities and women. 2. International franchising is going through a growth spurt. Franchisors recognize 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 recognize American products. Thus, the trend towards going global with franchises is proving to strengthen the franchising industry and its many companies. 3. Technology is changing the face of franchising and making already efficient business systems, almost flawless. From finding prospective franchisees to advertising and using extranets to communicate with franchisees, the world and the franchising industry is a very different and much more efficient place now that we have the internet and related technology.
Let the experts at FranchiseBuyer help you find the business that is right for you. Take a self test, get expert advice, research quality franchise companies, and identify franchise opportunities that meet your personal criteria. Franchise Buyer – Matching Serious Buyers with Quality Franchise Opportunities.
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