What is a Franchise? The FranchiseHelp Primer and Quiz

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Contrary to popular opinion, franchising extends far beyond food and retail. In recent years, franchises have become popular for the services and manufacturing sectors. The U.S. Census shows that in 2012, franchises alone accounted for $1.28 billion of sales. A franchise can be broken down into the following two specific categories:

Product or trademark franchising

This is a business in which the franchisee is required to sell goods produced or under the control and management of the franchisor. The franchisee has limited flexibility. The franchisor controls the operations significantly, but in return, the franchisee can look forward to a greater extent of assistance from the franchisor.

Payment options for franchisees in this kind of relationship usually entails them to purchase the trademarked goods from the franchisor or a payment of an initial franchise fee. The franchisee pays the franchisor for the right to distribute their goods.

Automobile dealerships are a perfect example of product or trademark franchising.

Business format franchising

Business format franchising is the most popular form of franchising, as most fast-food and eating franchises follow this format. Pinkberry, Holiday Inn, Dunkin Donuts, Century 21 and other popular brand names are examples of business format franchising.

This format is differentiated from product franchising in the sense that the franchisor licenses to the franchisee the use of an existing business system used by the franchisor and associated with the franchisor’s trademark. The franchisor usually provides significant assistance to the franchisee, such as: furnishing the establishments to maintain a certain “look and feel,” guidance in marketing and systems to avoid branding dissonance. The franchisee must adhere to the controls placed upon him or her and operate under the guidelines of the franchisor’s business system.

The business format franchise appears more mutually beneficial. Paying an initial fee and an ongoing royalty fee provides the franchisor with a continual supply of working capital while the franchisee can launch a successful business. The returns to the franchisee take place in the form of an existing brand identity, guided marketing outlines and promotional materials, existing financial models, greater cost benefits and the benefit of being affiliated with the franchisor’s collective purchasing power.

Once potential franchisees understand the type of franchise they are buying into, he or she must consider other critical points such as: would I function well as a franchisee? What kind of working hours would I be required to commit? How long is the franchise lease term? In other words: how does one go about buying a franchise?

Buying the franchise

Understand that franchising does not hand over the rights of a brand to a buyer, instead it is a leasing arrangement. The franchisor allows the franchisee to work with them for a specified duration of time. Therefore, it is very important for the franchisee to have their legal consultant look into their agreement before signing up.

Know the franchise

Understand why the parent company has decided to franchise. Every company deciding to do so hopes to improve the company’s image, as well as increase the capital and earnings. To begin, the franchisors’ responsiveness can indicate the relationship it shares with its clients. A delayed and lazy response can imply disorganized management or a lack of interest.

The information packet usually contains a detailed brochure regarding the business along with a questionnaire that is meant to probe into the qualification of the possible franchisee. The questionnaire usually asks for information regarding:

  • Assets
  • Liabilities
  • Net worth
  • Sources of income
  • Educational history
  • Previous employment
  • Credit references
  • Personal references
  • Motivation for buying a franchise

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After answering all of these questions and conducting a thorough investigation regarding the chosen franchise, you will be that much closer to launching your own franchise.

To see the best franchises expanding in your area, visit FranchiseHelp and take our Franchise Quiz.

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