Franchising 101: Terms, Traits, and Tools, Part I
Each year thousands of people reach for the American dream of owning their own business. Many of these people look to franchise ownership as a way to realize this dream while reducing the start-up risk. This series of articles will provide key information on how to evaluate and buy a franchise, along with the steps needed to begin your journey of business ownership.
For anyone unfamiliar with franchising, you should understand some of the terminology being used before getting in too deep.
First is the term franchisor. In your journey to franchise ownership, you will learn that a good franchisor is a successful business person who sells a model of his or her success and hard work so that others, like you, may reap the benefits of their experience, business savvy, time, and financial investments thereby avoiding the learning curve of mistakes.
Next is franchisee. You are looking to start a career, not a job; so instead of defining you simply as the person who buys a franchise and follows the franchisors rules, you are due the respect that you deserve. As a franchisee, you truly are an entrepreneur who buys a business from another entrepreneur, the Franchisor, who has created a successful; proven Franchise system, creates jobs in their local economy, a career for themselves and a vehicle for their own financial future.
Lastly is the infamous franchise disclosure document or FDD. Although it can be an intimidating document, the FDD is a sales and analysis tool. The FDD is the legal document that the franchisor is required by law to provide at least 14 days before they are allowed to accept from you a signed franchise agreement or any money. The FDD will teach you how much the franchise will cost, what your roles and responsibilities will be, and what the franchisor must do to help you during the franchise relationship.
Now that you understand the terminology used, it’s time to look at why you should consider owning a franchise.
Many people do not understand the power of franchising. Franchising as an industry does more for the U.S. economy and job rate than any other industry. Although helping the economy and job rate is a noble cause, most people go into business for themselves to be their own boss, to have job stability, and to build something to benefit themselves and their families. Franchising is a great mechanism to make this happen.
During your search for a franchise you should remember three rules: First, make sure the franchisor really does have a proven system that works; second, make sure that you are compatible with that system; and third make sure you will enjoy following and operating the system for as long as you intend to own the business! With the average franchise term being 10 years, you must choose a franchisor that you’re compatible with, in a business that you will enjoy operating for the full term. One way to determine whether the system works is to talk with other franchisees of that business. By law, the franchisor is required to list the existing franchisees and a limited list of former franchisees in the FDD. You should take full advantage of this list. Contact many of the franchisees and ask them things, such as what their opinion is of the business; whether they would recommend owning this franchise to others; and if they could do it all over again, would they?
With the above rules in mind, you should perform a cost/benefit analysis of the franchise or franchises you are considering. During your analysis consider whether the cost of that particular franchise is worth it. Look not only at the cost of the franchise fee, but also the total investment necessary to get the franchise open and operating. Make sure it is not more than you can realistically handle on your own, which we will cover in more detail in our next issue. You must also consider your lifestyle and family in your cost/benefit analysis. Almost all franchises will require that you attend training at the franchisor’s location for several days to several weeks depending upon the franchise system. Ensure you can afford to be for this time period. Additionally, owning and operating a franchise will bring new roles and responsibilities to your life. During your self-analysis, make sure that you are prepared to handle the additional responsibilities such as bookkeeping, payroll, regular communications with and reporting to the franchisor, hiring and firing, advertising and marketing, the overall day to day operations of running the business, and all other roles that may come up. If you are not strong in one of these areas, do not worry because there are franchise systems that allow you to hire managers to help with some of these roles.
Now that we have a general idea of the roles to be played in a franchise, you need to consider the types of franchises available to you.
Within all of franchising you will encounter two classes of franchises, the business format franchise and the product distribution franchise. Each format requires its own set of skills. In the business format franchise you will use the franchisor’s trademark, trade name, and be required to distribute the brand’s products or services. You will additionally receive the methodologies and procedures that are necessary for the successful operation of the franchised business, unlike in a product distribution system. A majority of the franchises that are purchased now are classified as business format franchises. Not as common, is the product distribution franchise, which can include gas stations and car dealerships. Product distribution franchises require that you distribute the brand’s products and services, but normally do not require or offer the use of the trade name or the trademark. For example, there is a popular BBQ restaurant in Texas that also contains a gas station selling a popular brand of gasoline.
Most people, when asked to name a franchise, automatically think of popular fast food restaurants; but what most do not know is that restaurants only account for about 25 percent of the types of businesses that are franchised. In the U.S. today, there are franchises in all types of industries, from medical to tax preparation businesses and from doggy daycare to senior care, just to list a few. Additionally, there are franchises that require commercial or retail space or those that you can run from your home. With over 70 different industries to choose from, there is a franchise out there to suit the needs, desires, and skill sets of any would be business owner.
In upcoming articles, I will take these discussions further and give you the tools necessary to further analyze yourself to find out whether you are fit for the franchise life. You will also learn what additional steps are needed to complete your journey to becoming a franchise owner.
Jason Power has been helping entrepreneurs review and negotiate franchise purchases since 2009. Jason is a regular speaker at the International Franchise Expo, West Coast Franchise Expo, Franchise Expo South and various other franchise expos where he gives tips on how to analyze a franchise before purchasing.