What is Franchising and How Does It Work?

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WHAT IS FRANCHISING HOW DOES IT WORK?

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Franchising is a great opportunity especially for
those who wants to be an entrepreneur and dont
have the desire or capability to start a business
from scratch. Essentially, a successful business
owner called the franchisor allows others to
franchise its business, allowing franchisees to
own and function independent locations under the
franchisors name and modelproviding framework
for the business. However, its the franchisee
decision to run the business itself and money on
it.
There are many fundamentals factors in the course
of exploring, acquiring, and running a franchise
business. In this guide, weve included
everything from what a franchising is and how it
works, to help you conclude whether buying its
the right option for you.
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What Is Franchising?
In order to run a franchise, the understanding of
franchisors business operations, including
inventory management, quality control techniques,
hiring standards, service techniques, market
conditions, regulatory or legal requirements and
the right skills and management experience are
essential for the franchisee. After the
franchisee develop the understanding of essential
factors, the franchisor authorizes the franchisee
to operate in a location. The franchisee will
work as they would had started their own
business, and is responsible for their locations
daily operations, upkeep, and administration,
along with continuing support and direction from
the franchisor. Eventually, the franchisor
decide how the franchisee will conduct their
business including site approval, design or
appearance standards, constraints on
products/services, operational methods, and
restraints on the franchisees sales region.
Certainly, the franchisee is legally compelled to
function under the rules (non-competes and trade
secret protections and standard franchisor
controls) establish by the franchisor in the
franchise agreement.
A franchising is an agreement where the
franchisor (business owner) gives right the
franchisee to sell the franchisors products or
services under its business name and model. The
franchise agreement also contains obligations and
restrictions along with the timeline for which
the franchisee can function and retains rights.
To put it simply, the franchisee functions using
the franchisors current framework and
operational procedures, while retaining
accountability for upkeep and operation of their
own branch.
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What are Franchising Fees?
Every franchisee must pay a fee in order to sell
the franchisors products or services. Heres an
overview of three major franchise fees that will
be defined in the franchise contract
Initial Franchise Fee
Advertising Fees
Royalty Fees
The initial franchise fee is a one-time, upfront
fee that the franchisee has to pay after signing
the franchise contract. By paying this fee, the
franchisor allows the franchisee to retain the
rights to sell the franchisors products or
services under the business name and model. The
initial fee vary with the industry and doesnt
cover utilities such as inventory, tools and
furnishings. According to the FTC Franchise Rule,
the minimum initial fee should be 500, and can
be over 100,000 in case of a Master Franchise
purchase.
Advertising fees help fund the franchisors
marketing budget. It might seems like an
unnecessary fee, but eventually, franchisees cash
in on the franchisors marketing effortssince
this is where the franchisees entire customer
base will comes from. This is calculated as a
percentage of monthly revenue, and will be lower
than royalty fees.
Royalty fees are continuing fees that the
franchisee pays monthly for the constant support.
Royalty fee is calculated as a percentage of your
revenue with range from 4 to 12, but the exact
amount changes based on the industry and volume.
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Considerations While Buying A Franchise

• While searching for the right business to invest
  your money in, its best to exercise due
  diligence to decide which company is a sensible
  investment. Here are few considerations to cling
  to when youre buying a franchise.

Franchise Capital
Name Recognition
Franchise Location
Training and Support
Franchisors Reputation
Your Personal Preferences
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You dont necessarily have to bootstrap your
franchise, you can secure franchise financing
from other sources as well. Read out guide on
basics of franchise financing and what you should
consider before applying for franchise financing.
Although you may not be able to get funding
immediately, but understanding eligibility
requirements for franchise loans can help you
plan beforehand.
A successful franchise management requires
capital. If you dont have the required capital
in hand, look for franchises according to their
investment requirements on Franchising.com. You
can also contact the franchise directly to learn
how much capital youll need to purchase and run
a branch.
Franchise Capital
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NameRecognition
In order to make money, franchisor name
recognition plays an important role. The more
recognized the brand is, the more youll be able
to earn. Apparently, its best to invest in a
franchise with solid brand image and reputation,
both nationally and regionally. The more name
recognition your franchise has, the less
marketing efforts youll need to put in to
attract customers.
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Franchise Location
On a similar note, investing in a franchise
thats popular in your particular demographic is
important. If the demand is low for a franchises
products or services in your area, extra efforts
and capital will be required to make the brand
recognized. Location is important so try
investing in a franchise thats popular with your
local demographic.
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Before finalizing a franchise business, evaluate
your potential franchisors training programs
carefully. In addition, check is your expertise,
education, and existing training is helpful to
working with a particular franchise. Although,
youll get all the necessary training to operate
your location, youll likely feel more relaxed if
you dont need to struggle with arduous learning
curve. Moreover, you should also calculate
whether your franchisor has the resources to
support you in the long term. You need to make
sure the franchise is capable to sustain support
and supervise over their existing franchisees as
they develop.
Training and Support
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Franchisors Reputation
Working with a reliable, qualified, and
trustworthy franchisor is also important.
Therefore, its best to explore all options to see
franchisors reputation, along with any complaints
filed against the company. You can start your
search by checking the franchisors BBB (Better
Business Bureau) ratings. You can also check the
franchisor business credit and financial standing
if theyre registered with Dun Bradstreet. For
local franchisor, you can contact your states
franchise authority to check franchisor
compliance with state laws, and whether theyve
had any lawsuits or bankruptcies.
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Your Personal Preferences
You should also consider your personal
preferences while deciding a franchise business.
The fact of starting a franchisee is same to the
fact of starting a new business It takes time,
effort, and commitment to keep your operation
going. Of course, you dont want to have a
business that you werent 100 passionate about.
Only go for the industry that motivates you,
whose routine you can easily follow, and whose
goals and objectives align with yours.
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Choosing a Franchise The Next Steps
After careful search and review of the franchise
business and the goals, the next step is to
assess each franchise opportunity. Start with
having a detailed conversation and requesting
copies of their business plan, operations manuals
and marketing material. The information you
collect from the interaction will construct the
research youve conducted by yourself.
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Read through the FranchisorsFDD
Once youve decided to take a particular
franchise, get their copy of Franchise Disclosure
Document (FDD). Under the FTCs Franchise Rule,
franchisors are bound to provide potential
investors with their FDD at least 14 days before
investor sign a contract. This period allows
investors to gauge their decision of signing the
contract. While selecting a franchisor, you can
request franchisor to provide an FDD before
submitting an application.
The FDD includes critical information about the
franchisor concerning their financial position,
background, capital requirements, and more.
Particularly, you need to review the following
pointers
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Any legal, permit, or licensing requirements
The franchisors background
The franchisors competition
Startup and operational costs requirements
Litigation history
Bankruptcies
Where, what, and how youre permitted to sell
their products or services
Restrictions on suppliers
Franchising fees
Training qualification and requirements
Renewals, transfers, terminations, and dispute
resolution rules
Three most recent audited financial statements
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Consider Getting Professionals Support
Although you have done your thorough research
before buying into a franchise, this also process
involves few complex financial and legal facets
that can be difficult to understand or to ride
out on your own.
Getting assistance from an accountant or legal
expert can help you understand the process and to
navigate it easily. Get help from an accountant
to become clear of the franchisors financial
aspects provided in their FDD, including a
realization of your potential earnings if you
pick to invest in that franchise. You accountant
can also help you choose a franchise by
evaluating your current resourcesmaking it a
practical investment for your existing financial
position. Lastly, your accountant can help you
outline a franchise business plan, and decide a
business structure after youve signed the
agreement. Getting help from a legal expert is
also important, especially when you receive your
franchise contract. A franchise legal expert can
examine your franchise contract to make sure it
is align with your best interests. The franchise
contracts are conclusive contracts for many
years, so its critical to carefully understand
what youre signing on for. Legal experts can
help you interpret the legal facets of a
franchisors FDD, along with your compliance with
state laws regarding franchising and the FTCs
Franchise Rule.
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Is Franchising Right for You?
To decide whether franchising is right for you,
evaluate the pros and cons before making the leap
into being a franchisee.
A solid brand recognition and loyal customer base
is the biggest benefit of buying into an
established franchise
Established national and local support for
campaigns and prepared marketing materials
Access to reputable suppliers for all the
materials franchisees need
Access to established network of support
Effective management and technical training
Financial support in terms of franchise loans
Access to proprietary trade secrets
Ongoing support along with research and
development from the franchisor
The perks of being your own Boss
Little risk than starting a new business
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The Cons
High initial franchise fee and start-up costs,
sometimes more than starting a new business
Monthly royalty payments, reducing your profit
potential
Payment of monthly marketing/advertising fees to
receive the marketing support from the franchisor
Some franchise contracts have explicit standards,
permitting little or no changes or additions to
the brand
Some contracts specify that franchisors must buy
supplies from an approved list of suppliers,
maybe at a higher cost.
Franchise contracts are binding contracts, so you
may be stuck for many years if you get on the
wrong side of it.
Your success is dependent on the success of your
franchisor
Theres no guarantee and you might have to work
smart and sensibly to make it work for you
Theres always risks in starting any new business
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The Bottom Line
Finally, its up to you to decide whether youre
able to run and grow a franchise business, or the
liberty to build and operate your own business as
you see fit. It is always in your best interest
to get assistance from professionals, friends and
family members and/or other franchise
professional. Its best to exercise due diligence
initially in order to make an informed decision
as opposed to find yourself stuck in a contract
with a shabby franchisor.
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