Are you tired of managing a corporate career you are unfulfilled with, and have a desire to transition into business ownership? It could be that franchising is for you. Becoming a franchisee is no small feat and requires dedication, research, and savvy business skills. The International Franchise Professionals Group (IFPG) provides franchising resources, education, and events for members of the global franchise industry. In this guide, we provide answers to the frequently-asked questions by investors interested in taking the leap into franchising in the United States.
What Is Franchising?
Franchising is a form of business partnership between an individual, called the franchisee, and a franchisor. The franchisor licenses a business model, including products and services, to the franchisee. The franchisee pays an agreed-upon sum for the franchisor’s guidance and assistance in creating and managing a business. In return, the franchisee typically agrees to use the franchisor’s system of operations, trademarks, and other proprietary information.
What Are Some of the Benefits of Franchising?
The primary benefit of franchising is that it simplifies the process of starting a business. By following a franchisor’s proven business model, franchisees significantly reduce the risk of failure compared to independent startup businesses. Since franchisees are based on an established business model, franchisors often provide high levels of training and support that can help to ensure their success in the market. Franchisees also usually receive a range of other benefits, such as access to exclusive products and services, preferential purchasing, marketing assistance, mentorship from experienced franchisees, and more.
What Are the Costs Associated With Franchising?
The costs associated with franchising can vary depending on the specific franchisor and the size of the franchise. Generally, franchisees pay an initial fee, ongoing royalty and marketing fees, and ongoing training and support costs. Before investing in a franchise, potential franchisees should carefully review the franchisor’s Franchise Disclosure Document (FDD), which outlines all the costs involved.
What Are the Different Types of Franchise Agreements?
There are several types of franchise agreements, based on the size and scope of the franchised business. The most common types of franchise agreements include:
- Traditional Franchises: Traditional franchises include the rights to operate an existing business under a proven system. The franchisee pays a set fee to the franchisor and in return receives the right to use the franchisor’s name, business system, and products.
- Regional Franchises: Typically, these franchises grant the right to operate in a wider area, such as a state or region of the United States. Regional franchisees may receive exclusive territory rights and may have greater control of their franchised businesses.
- Multiple Franchise Agreements: Also known as area development agreements, multiple franchise agreements usually involve the franchisor granting the franchisee the rights to franchise multiple stores over a fixed period of time. Multiple franchises are typically more expensive, but they offer greater potential benefits.
What Is the Process of Becoming a Franchisee?
The process of becoming a franchisee can vary from franchisor to franchisor but typically follows the same basic outline. First, potential franchisees must submit an application to the franchisor, including detailed information about their business experience. The franchisor will then review the application and either approve or reject the application. If approved, the franchisor and the franchisee will sign a franchise agreement and the franchisee will pay the franchisor the fees outlined in the FDD. Once the franchise agreement is signed, the franchisee will receive the rights to operate the franchise business, and can begin the process of setting up the franchised business in accordance with the franchisor’s system.
What Skills and Characteristics Are Required to Be a Successful Franchisee?
Becoming a successful franchisee requires a variety of traits. A successful franchisee should have strong communication and interpersonal skills, good business acumen, and the ability to manage and motivate employees. Furthermore, franchisees should have good organizational skills and a will to succeed, as well as a passion for the franchised business and a commitment to following the franchisor’s system.
What Are the Tax Benefits As A Franchisee?
The tax benefits of franchising depend on the specific Franchise Disclosure Document and structure of the franchise. Generally speaking, the Internal Revenue Service (IRS) allows franchisees to deduct the cost of supplies and start-up expenses, as well as other expenses related to managing and operating the franchise. However, as with any tax matter, franchisees should consult with a qualified accountant or tax advisor for an opinion in their specific situation.
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