Frequently Asked Questions.
Here are some common questions about Franchisingate.
1- What is franchising?
Franchising is a method of distributing products and services. At least two levels of people are involved in the franchise system:
- The franchisor, who lends his trademark or trade name and a business system; and the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
- Franchising is a contractual agreement between two parties.
2- How does a franchised chain start?
Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations. At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she may decide to “franchise” the store name and business system to an independent business person known as a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee’s sales. The business is now franchised.
3- Specifically, what kinds of businesses lend themselves to franchising?
Virtually every business form you can imagine.
The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z, from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.
4- What are the benefits of the franchising system to the franchisee?
Franchisee gets to benefit from an established brand that is experienced, successful and well-known with help and support of the franchisor.
- The international quality is achieved immediately..
- Customer trust is already established.
- Franchisor can provide personnel and training.
- The procedures such as, hiring is easier with the support of the franchisor.
- The support in finances, accounting and marketing increases the chances of success-The risks of opening a small business is minimized
- Franchisees can benefit from the franchisors counselors and legal team.
- Franchisee can benefit from the past experiences of the franchisor.
- When starting up it is easier to get loan or lease for franchisees.
- The cost of advertising and marketing is minimized.
- The franchisee isn’t alone when starting up and the risk of bankruptcy is minimal.
- Although the initial payment is higher than a normal small business but the follow up expenses are much less.
5- What are the downsides of the Franchising System to the Franchisee?
- Creativity is lost.
- There is the obligation of following the rules and regulations of the franchisors
- If the franchisee doesn’t pay attention then the franchisor ends up taking most of the profit
- If the brand is widely known then it gets to be more costly.
- The products that the franchisee is obligated to buy from the franchisor can be costly than the market prices
- If the contract has loopholes then it can be more beneficial for the franchisor.
- If there are trust problems between the parties then the franchisor can limit the franchisee in many ways.
6- What Should You Consider When Choosing a Franchisor?
The terms of the Franchisor is very clear in America. But it is not clear in our country. “American Associated of Franchisees & Dealers’ mentions 7 important facts about choosing a franchisor:
A- The Franchisor has to sell his/her product or service in the best way possible.
- Some firms try to sell the franchise first.
- The short term income from the stores can seem attractive from the long term income from the profits of the stores. But this way the franchisee can be confused in the long run.
- Well known big companies first came to Turkey to invest.
- The positive Picture created by these companies can be misleading.
- Like we see in every country fast growing franchises can come quickly but cannot achieve long term success.
- Franchisee has to take this into consideration.
B- Franchisors have to use the franchisees as their marketing tool the franchisee has to choose franchisors that sell their own products and market them through catalogs, TV, etc. If the franchisor needs the franchisee for marketing purposes then their relationship has to be closer.
C- There has to be market demand for the product/service.
If the business has so many duplicates in the market or not in demand anymore then the success may not be achieved.
D- The Brand has to be trusted and well-known, the main reason to the investor to get a certain franchise is the brand recognition. One should also consider how the brand is known. The franchisee has to do a thorough market research.
E- Franchisor should provide training, continuous support, and an effective marketing approach.
F- The franchisor has to have good relations with the franchisees. In order to have effective and successful business relations the knowledge and capability of the franchisor should be questioned.
G- The stores run by the franchisees have to keep good record of finances and sales.
7- If i want to buy a franchise, what should i do to get started?
The first thing to do is to identify companies offering franchises. IFA’s Franchise Opportunities Guide gives a comprehensive list of franchise companies in more than 75 kinds of businesses. The Guide, which costs $25.00 (including shipping and handling), is available by mailing a request and check or money order to IFA Publications, P.O. Box 1020, Sewickley, PA 15143. Orders may also be placed by calling 1-800-543-1038, or visiting IFA’s online bookstore at www.franchise.org, where you can find other relevant sources to assist in your decision to buy a franchise. The Guide is also available online at the IFA website – www.franchise.org.
You should contact the companies directly, and “shop wisely.” “Shopping wisely” requires that you determine how much you can afford to invest and where to obtain financing. Careful investigation prior to purchasing a franchise also necessitates understanding the UFOC. You need to examine what the franchise relationship entails. For instance, you need to inquire into the training and support provided, assistance in finding and developing a location, and the sources of inventory and supplies. You should research the companies’ growth and prospects for future growth. You should also seek advice from professionals and business people you respect. By shopping wisely, you can make an informed decision on whether to purchase the franchise.
8- Are you Franchisable?
Is your business profitable? Can it be duplicated? Do you have a system a franchisee can easily follow? Then you will probably love the idea of using someone else’s capital to expand your company.
Why franchise? Franchising isn’t the only way to expand your business, but it offers benefits that other methods can’t. For instance, if you have the right idea, at the right time, and have the funds to support it, franchising can help you get to market quickly.
9- What are the Benefits of the Franchise System to the Franchisor?
- The Money generated from the franchisee is profit for the franchisor.
- The growth and expansion are achieved with minimum expenses.
- The increase in production creates an increase in the line of credit of the company.
- Faster and more selective distribution becomes possible.
- There is a constant circulation of information within businesses.
10- What are the downsides of the Franchising System for the Franchisors?
- The unpaid fees can be a problem.
- The payment for the services and equipment can be hard to collect.
- When the franchisee expects everything from the franchisor it can be a problem.
- A well- established brand can get a bad reputation because of a wrong choice of franchisee
11- What are the Obligations of Franchisors and Franchisees?
A- The obligations of the Franchisors
The franchisor has to follow these rules: – Before working with the franchise system they have to work at a pilot store of their own. – The franchisor has to have the rights and royalties of a certain brand or service. – The franchisor has to provide training and support through the course of the contract.
B- The Obligations of a Individual Franchisee
- The individual franchisee has to follow these rules: They should be willing to work for the improvement of the franchise system and keeping the brands reputation.
- The franchisee has to provide the franchisor with up to date information on finances and sales. They should be able to provide any paperwork when the franchisor asks for it.
C- The obligations of both Franchisors and Franchisees
Both parties have to be honest. Franchisor has to warn the franchisee in writing if they don’t follow their part of the contract. The parties should try to reconcile their differences with honesty and dignity.
What if you want to be a franchisor without opening your own franchise business?
You may decide that running your own franchise is much more than you can or want to handle. What you can do in this case is to invest in somebody else’s franchise. This way you will be a franchisor but you will be able to decide how involved you would like to be.