Buying a franchise

Question 1

What is a franchise? Franchising? Franchisor? Franchisee?

Answer 1

Franchise: the business that markets product/service developed by franchisor, typically in manner specified by franchisor.

Franchising: system of operating a franchise governed by a legal agreement.

Franchisor: person or company who develops/sells a franchise and specifies the terms and methods of the agreement.

Franchisee: the second party to the franchise agreement and owner of a franchise unit or territory rights.

Question 2

Be able to distinguish the features of the two main types of franchises. What are the other two important types of franchises?

Answer 2

Product and trade name franchising:

Licensing of the product or the production of the product, and use of the trade mark, logo, or other identity of the franchise. Essentially a supplier-dealer relationship.

Business-format franchising:

Purchase of an entire business model and system, including access to management expertise. Franchisor controls: accounting, marketing, operations, QA

Question 3

Recognize and describe the main advantages and disadvantages (drawbacks) of franchising.

Answer 3

Advantages:

increased probability of success, start up assistance, instant recognition, purchasing power, advertising and promotional support, operating guidelines,

Disadvantages:

Constraints on creativity and freedom, costs such as star-up fees/royalties/coop advertising fee, franchisors are focused on creating wealth for themselves, standards and termination, start-up and ongoign assistance provided by a franchisor does not guarantee success.

Question 4

Who regulates franchises? What is the FDD? What does it do? What does a franchising agreement do?

Answer 4

FTC is the primary agency involved in oversight.

FDD: Franchise Disclosure Document. Provides info in common format on fees and cost, contractual obligations, territory, data regarding existing units

Franchise agreement: legal contract between the parties in a franchise. Written by the franchisor, primarily for the benefits of the franchisor.

Question 5

Recognize and describe the steps in franchise selection.

Answer 5

Take time to reflect and engage core supporters.

Identify potential franchises(consider industry, type of franchise, geography, brand, NOT gender)

Do research to narrow the list of options.

Decide if you will use a franchise broker.

Visit and observe franchise operator(s).

Request preliminary info from franchise companies

Perform due diligence on a specific franchise such as fully understand the FDD, call on existing franchisees, visit the franchise headquarters, do internet reserach

Explore financing options

Make a decision, engage professional counsel, and negotiate an agreement

Makeit work.