Are you nearing retirement, but looking to build something? A franchise could be your perfect option. Being the owner of a franchise business can be a lucrative endeavor, but as with any business, you need to ensure you have the right information, resources and plan in order to ensure success.
The International Franchise Professionals Group (IFPG) is a membership-based franchise consulting network with more than 1,300 franchisors, franchise consultants and vendor members. This network is dedicated to forming partnerships between aspiring business owners, offering sound advice, and guiding them through the process of identifying and investing in franchise businesses. In this article, we’ll address some frequently asked questions on the franchising definition.
What is Franchising?
In business, franchising is when a company, the “franchisor”, allows and contracts a counterpart, the “franchisee”, to use the franchisor’s existing business framework selling customer goods or services, typically in exchange for a regular fee. By entering into a franchise agreement and doing business under the franchisor’s terms and conditions, franchisees benefit from the franchisor’s existing brand name and business model. This allows franchisees to market and sell goods or services quickly and comparatively easily.
Types of Franchises
Franchise agreements come in two different forms: product/trade-name franchises and business format franchises. Product/trade-name franchises are agreements solely dealing with a supplier offering the right to a reseller to market and sell the supplier’s goods under their branding, which may or may not entail the right to use the supplier’s business model and system of operation. On the other hand, a business format franchise is a more comprehensive agreement which includes the right to market and sell the franchisor’s goods or services, and also includes additional assistance such as the right to use the franchisor’s business model and system of operations.
Benefits of Franchises
Franchising can be an avenue for aspiring entrepreneurs, offering numerous benefits, such as:
- The good reputation already established by the franchisor
- Opportunity to be part of a founding brand or business model
- Beneficial tools and advice from the franchisor
- Access to the established customer base and increased exposure
- On-the-ground support from the franchisor
- Shared profit from collective advertisement and marketing efforts of the franchisor
- Operational structure already in place
The Franchise Agreement
The franchise agreement is the official document that sets branch the expectations of both the franchisor and the franchisee. It includes provisions of the legal and business relationship between the two parties, as well as rights and obligations associated with the business.
The following are typical sections that can be found in a franchise agreement:
- Franchise definition and term
- Licensing provisions
- Responsibilities and restrictions on the part of the franchisee
- Obligations on the part of the franchisor
- Systems and business services use rights and restrictions
- Fee structure and payment terms
- Termination, renewal, and dispute settlement provisions
Are There Risks Associated With Franchising?
Like with any business investment, there are potential risks associated with franchising. When considering a franchise opportunity, do your due diligence to ensure you understand the obligations that come along with the franchise, as well as the associated risks. It is important to evaluate the core issues, such as the franchisor’s financial stability, the cost of the franchise, the franchisee’s ability to finance the initial investment, and the need to have a reliable customer base within the franchised area.
Some potential risks to consider include:
- Sufficiency of funds or financial strain
- Lack of autonomy and control
- Inadequate marketing and support from the franchisor
- Unclear termination and renewal provisions
- Competition from other franchises of the same brand
- Difficulty meeting the franchisor’s stock-control regulations
Investing in a franchise business can be a challenging experience, but by understanding the franchising definition, types of franchises, benefits of franchising, and risks associated, you can approach the process more confidently and successfully.
The International Franchise Professionals Group (IFPG) provides an ideal platform for reviewing franchise documents, connecting with experts, and finding prospective business partners, all of which can help you build your franchise business.