Franchise Questions and Answers
What is franchising?
Franchising is a method of expanding a business by licensing its trademark and business system to a franchisee in exchange for a franchisee fee and royalties, and the right to operate a franchise using the business system and trademark of the franchisor. Most importantly, the franchisee must conduct its business operations in accordance. Franchisors provide franchisees with pre-opening training, post opening training, and continuing support.
What are the advantages of franchising to the franchisor?
There are many. Since franchisees pay the costs of opening their own unit, franchising allows the franchisor to expand its business without spending significant dollars per unit. Keeping costs low per unit reduces the franchisor's risk while increasing the overall return on investment. Franchising generally allows the franchisor to grow its business faster than it would be able to do so otherwise. Additionally, not having to manage each unit on a day-to-day basis allows the franchisor to devote more time to developing its brand and its position in the market. Other advantages include reducing risks relating to signing leases, obtaining financing, and vicarious liability for employees.
What is a Franchise Disclosure Document (FDD)?
Before a franchisor is legally permitted.to sell a franchise, the franchisor must comply with the rules of the Federal Trade Commission (FTC) and statutes enacted by the State of California and any other state(s) into which the franchisor is spelling. The purpose of these laws is to require the franchisor to provide a prospective franchisee with the information needed to. make an informed decision as to whether or not to purchase the franchise. The FDD is similar to the older UFOC but does contain differences. As of July 1, 2008, all franchisors must use the FDD format and are no longer permitted to use the UFOC format.
A FDD consists of 23 separate items of information and is intended to provide a prospective franchisee with all of the material information about a franchisee system that the prospective franchisee will need to make an informed decision whether or not to purchase the franchise. An FDD is similar to a stock information so that a prospective franchisee can make an informed investment decision.
What happens if I sell a franchise without getting it approved?
A FDD consists of 23 separate items of information and is intended to provide a prospective franchisee with all of the material information about a franchise system and the prospective franchisee will need to make an informed decision whether or not to purchase the franchise. An FDD is similar to a stock prospectus in that its purpose is to provide sufficient detailed information so that a prospective franchisee can make an informed investment decision.
Are franchise agreements negotiable?
There is no law preventing franchisors and franchisees from negotiating the terms of a franchise agreement. Franchisors often say their franchise agreement is nonnegotiable. The truth is that some franchisors are willing to negotiate terms, and some terms are more negotiable than others. For example, while franchisors may not be flexible in negotiating their royalty fees, they may be agreeable to negotiating other terms. Generally, whether a franchisor is willing to negotiate terms is a matter of leverage. It clearly helps to have a franchise attorney representing your interests.
What are the most common types of disputes between franchisors and franchisees?
• The termination of the franchise agreement,
• Renewal provisions,
• Use of advertising funds,
• The sale of the franchisee business, and
• A well written franchise agreement can eliminate or at least minimize these types of disputes.
What is the number one reason businesses develop franchises?
Selling franchises is similar to making an initial stock offering (IPO) because outsiders are given an opportunity to purchase an interest in an existing business. operation. Franchising permits a business to expand rapidly over a diversified geographical area with relatively mina capital, providing an opportunity for the franchisor to make money.
We have owned and operated a small publishing business for several years and believe it could be used as the basis for creating a successful franchise. We don't know where to start. What type of budget will we need?
Our no cost initial consultation was designed to help people like you and to provide us with the information needed to help answer your questions.
In your opinion, what types of businesses are the most feasible to franchise?
First, there should be a strong demand for the product or service and the business should be profitable. The business should not be so complex that it is extremely difficult or impossible to explain it iii an operation manual. It should also be the type of business that would appeal to the large percentage of people seeking to own their business. While there are hundreds of.possibilities, some of our choices include: publications, security guard and patrol-services, property management, real estate brokerage, restaurants, HVAC contractors, bookkeeping services, and insurance brokerage.
How can a franchisee be certain that the franchisor will provide long term support including advice?
As a prospective franchisee, you need to recognize that the long-term success of a franchisor is tied directly to the success of its franchisees. Franchisors make most of their money from royalties which are generated when franchisees earn income. Franchisors earn additional money by selling franchises. However, a franchisor's long-term success in selling franchises is tied to the reputation of the franchisor which is directly tied to its relationships with its existing franchisees. In short, it is in the best interest of a franchisor to do everything reasonably possible to make its franchisees successful That includes providing long term support and advice.
What is the difference between a franchise consultant and franchise broker?
The terms franchise consultant and franchise broker are terms of art or industry terms.
Franchise consultants assist prospective franchisees in determining what franchise they should purchase. Generally, franchise consultants represent many franchisors and have made arrangements with them to get compensated a percentage of the franchise fees the franchisors collect from their referrals. Their compensation does not increase the cost of the franchisee because it is paid by the franchisor for its marketing activities and for qualifying each referral. In short, the prospective franchisee obtains the assistance of the franchise consultant at no cost while the franchisor receives a qualified prospect.
Franchise brokers are licensed real estate brokers that represent buyers and sellers of existing, operating franchised businesses.
Franchise Disclosure Document (FDD)
Sample FDD Table of Contents