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WHAT IS FRANCHISING?
Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) 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.
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.
HOW WIDESPREAD IS FRANCHISING?
The answer may surprise you. By 2001, there were 767,483 business establishments in all domestic franchise systems (either owned by franchisors and franchisees), which employed almost 10 million people, with direct output close to $625 billion, and a payroll of $230 billion. These establishments account for significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table/full service restaurants.
WHAT IS "BUSINESS FORMAT" FRANCHISING?
In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. The major advantage of buying a business format franchise is that the “system,” the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.* Sales by business format franchisors continued to increase steadily throughout the 1990s and into the 21st century. In 2001, comparing business format franchising to product distribution franchising, business format franchising had about 4.3 times as many establishments, employed 4 times as many workers, generated 2.5 times the payroll, and produced nearly 3 times as much output.
WHAT SHOULD I CONSIDER BEFORE BUYING A FRANCHISE?
Among the points which Franchisingate recommends for investigation are: a. the type of experience required in the franchised business; b. a complete understanding of the business; c. the hours and personal commitment necessary to run the business; d. who the franchisor is, what its track record has been, and the business experience of its officers and directors; e. how other franchisees in the same system are doing; f. how much it's going to cost to get into the franchise; g. how much you're going to pay for the continuing right to operate the business; h. if there are any products or services you must buy from the franchisor and how and by whom they are supplied; i. the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years; j. the financial condition of the franchisor and its system.
WOULD I MAKE A SUCCESSFUL FRANCHISEE?
A successful franchisee should be suited to the industry of which he or she is a part, suited to the particular franchise company, and suited to the franchise system generally. Important questions to ask yourself include: Am I suited to the industry physically and by experience, education, learning capacity, temperament and financial ability? What type of work is most appealing to me; for example, do I enjoy working with food, mechanical things, people, real estate, books and recordings, sporting goods, etc.? Am I prepared to work hard and take financial risks? Do my advisors, family, and friends think I am adaptable and trainable? How do I react to controls? Am I a loner - resenting authority and restraints, or can I accept guidance and direction happily? If I prefer to act as a passive investor in the franchise, will the company accept this? How do I personally feel about the company's image and products and services? The right answers to these types of questions help determine your potential success as a franchisee.
HOW CAN I BE SURE I WON'T LOSE MONEY?
No one can be 100 percent sure. Although the majority of franchisees are satisfied, successful business people, some do suffer financial losses. That's why you must be particularly wary of any company which "guarantees" profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of earnings claims, you must recognize that your success can come only through hard work. Success or failure ultimately depends on you.
ARE THERE ANY CURRENT TRENDS IN FRANCHISING?
• Franchised businesses continue to grow in all corners of the world. Domestic franchisors in many countries are increasingly establishing franchises across borders. More than 400 U.S. franchise systems operate internationally. International franchising has been successful because consumers around the world recognize famous brands as symbols of quality, consistency, service, and value. • If you are considering the purchase of a franchise, you may want to not limit the scope of your search to franchisors in your home country. Increasingly, franchisors are seeking franchisees internationally, and a foreign-based franchisor may provide you with the franchised opportunity you are seeking. • In many cases, foreign-based franchisors offer individual franchises to operate a single unit. They also often offer development rights to operate multiple units and “master franchise” rights. The latter is, essentially, an opportunity to be the “franchisor” for the foreign-based concept in your country or a portion of your country. • Of course, international franchising presents some different challenges than domestic franchising. For example, if goods will come from overseas, you may need to be aware of various duties, tariffs, and transportation requirements. You also need to consider language and cultural differences. For instance, if you are a franchisee in a different country from the franchisor’s home office, the franchisor’s system may need to be modified for use in your country.
HOW DO I CHOOSE THE RIGHT FRANCHISE?
Deciding which franchise is right for you is a huge decision. The right business should not only interest you, but the initial investment amount must fit into your budget and it should enable you to live the lifestyle you desire (do you want more free time, more money, control over your work environment?). Additionally, any business you choose to buy must meet a market demand in your community. If there is no market demand or the area is already saturated with similar businesses, your new business will not have a bright, long future ahead of it. The best advice is to do your research before signing a franchise agreement. Speak with current and past franchise owners and make sure there is in fact a demand for the business in the area you’d like to open the business.
WHAT ARE STAGES OF ESTABLISHING A FRANCHISING CONTRACT?
First of all the franchisor as to prepare a introductory package fort he franchisee. This package contains information about the firm and forms to be filled out as well as financial information. There are also three guidebooks that franchisor is obligated to give to the franchisee. First one is the book about the main company, second one is the book about the obligations of a franchisee, and third one about how to run the business also known as the ‘know-how’ book. Franchisee has to be very careful when choosing a Franchisor analyzing every aspect from finances to business conduct. At the same time the Franchisor has to do the same for the Franchisee. After getting acquainted the parties start negotiations. First they choose the business location. After that they decide on the capital, payment options and return on investment. According to the outcome the franchisee makes a decision and they sign the contract. The contract must be in detail covering all the aspects of the business. Upon singing the contract the franchisee starts the payments. The payments are made according to the articles of the contract and can be different for every franchisee. The franchisee then starts setting up the store. The decoration , training, and personnel is chosen with the help of the franchisor. Some franchisors will do everything fort he franchisee. After all the preparations the franchisee is ready to open for business. During this time a representative from the franchisor firm will be helping the new franchisee.
WHAT ARE WAYS OF THE PAYING THE ‘FRANCHISING FEE’?
There can be different ways for payment of the franchisees: Lump Sum fee due at the signing of the contract. Royalty payments due at certain terms. Franchisor can also ask for extra fees for services provided to the franchisee. The payment type (cash, check, etc) will be decided by the contract.