To begin with, what exactly is a franchise? A franchise is an arrangement in which a party, namely the franchisee, purchases the right to sell and/or market a product or service from the seller, namely the franchisor. That right to sell is the franchise.
Purchasing a franchise is an attractive venture, because the successful franchises have proved themselves over an extended period of time. They also combine many of the benefits of business ownership because of the experience of the franchisor. Moreover, good franchises generally enjoy a higher rate of success over other types of businesses.
Advantages of purchasing a franchise:
- Minimum risk. A reputable franchise has proved itself worthy as a business method.
- Name recognition. A "household name" can attract customers to the business while providing a competitive edge for the franchise.
- Training. A franchisor has the resources to make available a regimented training program for a franchisee, even with no experience.
- Support. A franchisor offers managerial support and problem solving tools.
- Economies of scale. Substantial savings can be enjoyed when inventory is purchased in bulk by the franchisor.
- Advertising. By the utilization of cooperative advertising programs, national exposure can be purchased at competitive prices.
- Financing. In many cases, the franchisor will provide assistance with obtaining business financing. Lenders tend to favor franchises for financing, considering these ventures less risky than new start-up businesses.
- Fees. Franchise fees are due at the inception of the franchise agreement, and the amount can be anywhere from several thousand to several hundred thousand dollars.
- Royalties. Many franchise agreements include a monthly fee based on a percentage of the business's monthly income, even if the business is not enjoying profitability.
- Loss of control. The franchise is bound to standards set forth in the agreement, leaving the franchisee limited control over the business.
- Required purchases. Certain materials may have to be purchased for maintaining uniformity in the product or service.
- Termination clause. A franchisor may stipulate that it retains the right to terminate the franchise agreement.
Keep in mind: common sense and good judgment are the best guidelines here. If you feel ready to purchase a franchise, be sure you have educated yourself as much as possible on the operation. Research the business and find out how reputable it is. Many franchisors talk a good game but can be unscrupulous. Most importantly, get expert guidance from an attorney or accountant.