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FAQ's
Important Facts About Franchising
What is the history of franchising?
"How did it all start?" Few people really know the exact answer. According
to definition, the word "franchise" comes from old French, meaning privilege
or freedom. Some say franchising began with an effort to collect taxes, as
governments would select certain people to gather fees within a given
geographical area. These "collectors" as they were called, kept a sizeable
portion of the monies collected and remit the balance to the Pope. Other
historians say franchising started with a privilege bestowed by the local
sovereign -- or lord - giving merchants the right to hold fairs, market
their wares, trade, run local ferries or hunt on their lands. Essentially,
this was an endorsement of a monopoly on commercial ventures. This common
practice was perpetuated throughout the Middle Ages, and eventually became
part of European Common Law.
Franchising
continued its evolution in the economies of the world. The most sited
example occurred in Germany in the 1840's when major ale brewers granted
exclusive rights to certain taverns to sell their brew. In 1851, the Singer
sewing machine company granted limited distributorships for their famous
sewing machines. The language, format and contractual agreements utilized in
that early franchise document (i.e., Prospectus or United Offering Circular)
are still utilized today.
Around the turn
of the century, the face of franchising looked very much the same; it
essentially granted the right to distribute and sell a product. At this
time, the trend-setting model was the franchising rights authored by oil
refineries and automobile companies.
After WWII,
millions of servicemen and women returned home, and with that - the Baby
Boom began. The large work force demanded the opportunity to explore and
develop more and better business opportunities, which changed the business
and our economy forever. With these demands, franchising evolved into the
dominant and most successful concept - business format franchising. In this
type of franchising, the franchisor (example: McDonald's) not only allows
the franchise to use its name and sell its products or services, but also
involves the total transfer of a way of doing business. This includes
marketing, operating, technical training, management techniques and
expertise developed and perfected by the franchisor (sometimes referred to
as a "learning curve"). The franchisor will also provide on-going training
and support throughout the life of the franchise agreement.
A rapid growth
in the 60's and 70's presented a perfect opportunity for the "franchise
concept" to grow and flourish. At the same time however, franchising
experienced some harsh growing pains. Along with the honest and solid
franchisors, emerged the unscrupulous and fraudulent; misappropriating the
licensing fees and literally running out of town. Others were
undercapitalized and faltered in their concept, leaving in their wake--- the
franchisees. Still, other franchisors had been careless in selecting the
right "franchise" and thus, partnered themselves with erroneous individuals
and misrepresented their company.
In spite of all
of the hardships and stumbling blocks, franchising has emerged triumphant,
as it remains as the most clear and viable business concept. Franchising, or
more specifically, business format franchising, affords entrepreneurs
interested in self-employment a strategic partnership or relationship that
is governed by a contract or franchise agreement for a defined period of
time. When you purchase a franchise you are investing a proven and refined
system that should have a brand name, successful operating system and a
history of quality service and success. The common goal for the franchisor
and the franchisee is to dominate a particular market and keep customers
coming back for more. All members (franchisees) of a particular franchise
system share the responsibility of maintaining high standards of quality,
consistency, convenience and other factors that contribute to the success of
building a dominant brand, loyal customers and repeat business for everyone.
The ultimate
success of the franchisee (individual franchise unit owner) is based on the
proven success of the franchisor. If the franchisor offers an established
product or service with a well-recognized brand name, a history of success
with company units and existing franchises, is well financed and motivated,
your chances of success are very high. And, although franchising is now a
very highly regulated industry, it is important that you ask the right
questions, seek the right advice and consider your objectives before
investing in any franchise opportunity.
The history of
franchising is like any other - with turns, twists, hills and valleys. But
observe any busy street corner to understand the power, value and foot hold
that franchising has accomplished. It is a highly regarded and regulated
industry, which encourages the creation of business opportunities with
guidelines, procedures and advice.
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Is
franchising right for you?
If you are the type of person who desires to own your own business and
be your own boss, then there may be a place for you in franchising. The
varied opportunities available in franchising are drawing people from every
walk of life, as corporate and professional people are buying franchises
every day. The numbers of women and minority franchise owners is
dramatically increasing, as is the number of young owners, recently out of
college. Investors at all levels are finding that few financial investments
can compete with the potential income and personal growth of an established
and reputable franchise.
Franchising is especially attractive because it offers people with various
levels of capital and experiences a good opportunity. However franchising is
not for everyone, as some people will not adjust well to a franchisor
setting. Franchisors have established standards and rules, sometimes making
decisions that you might not agree with. Before you invest,
investigate…ensure that you understand the franchise model and that it is
one with which you agree.
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What kinds of
franchises are there?
More than 750,000 franchise businesses constitute the North American
small business landscape, generating more than US$1 trillion in sales. With
a new franchise business opening somewhere in the United States every few
minutes each business day, franchising is indeed the success story of the
1990's. Within the various search capabilities of Franchise Guide Online, we
have assimilated literally hundreds of Franchise Guide Online that encompass
virtually every category of the small business spectrum. Browse our database
and locate offerings that interest you. On many, we have "web brochures"
which describe the business and provide ample information to help you
determine if you want to request their complete business package.
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What can a
franchise do for me that I cannot do for myself?
A franchise is already a functioning business system. While
entrepreneurs must utilize thousands, millions or even billions of dollars
in order to set up a profitable business model, a franchisee can step into
an already established concept, with much less risk for failure involved.
For example, are you aware that as many as 80% of new business start-ups
fail each year? An already functioning business model will put you heads and
shoulders above the novice entrepreneur who not only needs to generate
profits, but also needs to develop a profitable business model. For
instance, fast food businesses greatly benefit from their association with
the brand name and products of the franchisor. That might not hold true
however, for a wash.
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How much
profit will I make?
Although the success rate for franchise-owned business is generally
better that the success rate for many independent businesses, there is no
formula to guarantee victory. The same may also be said of the profits
generated. Often the margins you make are a reflection of your ability to
properly run your franchise, however you may be able to get a document from
the franchisor that illustrates the typical franchise earnings. If the
franchisor does not provide such a document, you should contact a number of
franchisees in the market you are interested in and seek their advice on the
business' profitability. One bad apple does not mean the concept is flawed,
so be sure to speak with at least five franchisees.
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How do I
investigate the franchisor?
Acquire the franchise document (Uniform Franchise Offering Circular),
which is often referred to as the UFOC. This document is prepared in
accordance with the requirements of the Federal Trade Commission (FTC). It
contains information on the principals, their backgrounds audited financials
and a lot of other pertinent data - including the current franchise
agreement. Included in the UFOC is a list of franchisees, which we suggest
contacting and if possible, visit prior to commitment. Be certain that you
like the business. Gather candid comments from a representative number. If
you reach someone who seems negative, attempt to determine if the comments
appear legitimate. Don't assume the business model is the problem solely
because you speak with a negative person. Furthermore, if you can see the
franchisor prior to your investment, we suggest taking the opportunity to
meet the people you will depend on for support.
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How do I know
if I can afford it?
Before investing in a particular franchise network, carefully consider
how much money you have to invest, your abilities and your desired goals.
The following checklist may help you make your decision.
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Your initial
investment
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How much
money do you have to invest?
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Will you
pursue the franchise by yourself, or with partners?
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Will you
need financing and where can you obtain it?
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Do you have
a favorable credit rating?
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Do you have
savings or additional income to live on while starting your franchise?
One of the
primary reasons for business failure is under-capitalization. While the
franchisor will give you a good idea of the initial costs, understand that
they can sometimes vary due to leasehold improvements, unanticipated needs,
etc. You must have enough money to open your franchise and run it until the
time when it is profitable. Check with franchisees in your area, to
determine what their start-up capital requirements were and add 10%- 20% as
a safety net.
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Will the
franchise help me finance?
While there are franchisors that do assist in franchise financing,
others do not. This will vary from franchisor to franchisor. Seek the
financing options offered by the franchisor but also consider friends,
family, investors, the Small Business Administration (SBA) and if you have a
relationship with your local bank, certainly deem it as an option as well.
Additionally, Franchise Guide Online offers a Resource Center with lenders
who want to help.
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Where can I
find additional sources of available capital?
Franchise Guide Online has a Resource Center that offers information and
additional sources of capital for small or start-up businesses. Visit our
Resource Center by clicking here.
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