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Definition Of Franchise

According to the US Small Business Administration (SBA), the definition of franchise is, “a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business.

In this business model, the franchise agreement defines how the two parties work together. In most cases, the franchise owner sells goods or services that are either supplied by the

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franchisor or meets the franchisor’s specifications and standards.

The definition of franchise should also include the key fact that a successful franchise relationship is a true partnership between the franchisor and franchisee. The franchisor brings resources to the table that the entrepreneur might not have otherwise.

This includes business knowledge like the overall business model, marketing plans, site location, training, supply chain, and financial assistance. In return, the franchise owner provides the motivation and energy to transform the plan into a profitable new member of the franchise network.

Two basic forms of franchising are included in the definition of franchise. In product or trade name franchising, the parent company only allows their franchise owners to use their name or trademark. The more commonly used, and more complex, model is business format franchising. This type of franchise creates an ongoing partnership between the franchisor and the franchisee that could include site selection, marketing plans, training, inventory, and more.

Definition Of Franchise – The Pros and Cons of Franchise Ownership

Like any other business venture, there are both advantages and disadvantages to purchasing a franchise. The main advantage is that the new franchise owner will likely be up and running more quickly with a proven business plan and a full support network. As soon as the doors open, an established customer base recognizes the brand name and is ready to buy.

The new business owner won’t have to develop their own marketing strategy or wait for customers to realize that the business can fulfill their needs. In many cases, corporate support is available to help train employees, establish management procedures, and ensure that everything runs as smoothly as possible. Other advantages include pre-defined quality control standards and easy opportunities to expand.

On the other side, the business owner gives up a large portion of control to the franchisor in exchange for this level of support. They may not be able to add new products or even change their facility without approval from the corporate office. Sometimes, the franchise reality doesn’t quite live up to expectations or what was stated in the contract.

Although legal remedies are available, it can be very expensive to fight a large corporation who feels that they operated in good faith. Franchises

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can be expensive to operate if they aren’t performing up to standards.

While franchises may cost less in the beginning than opening your own unique business, the franchise owner must often pay periodic royalties. These royalties can sometimes be high and can last much longer than most business owners need the ongoing support of the parent company.

In the worst possible scenario, a franchisor can decide to not renew the franchise contract or terminate

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the agreement, and the franchisee is left with no brand name of their own.

Thoroughly Evaluate Each Franchise

Before deciding on a franchise, carefully evaluate the opportunity to make sure that it’s a good fit for your individual situation. Research all costs involved with opening the franchise including the initial franchise fee, facility and inventory costs, advertising fees, and continuing royalties.

Review the contract to determine who is in control of specific decisions. In many cases, the franchisor may want final approval of your building site, sales territory, goods and services sold, and even employee uniforms and hours of operation.

Finally, make sure that you understand the terms of the agreement. In many cases, the franchisor reserves the right to terminate the agreement if you don’t fulfill your end of the bargain. At the end of the contract term, your franchise renewal is not guaranteed or the terms could change. Above all else, make sure that the franchise is a legitimate opportunity and not a scam.

Franchise statements and contracts can be long, tedious, and often complex documents. To make sure the contract is fair and that your needs are fully represented, it is best to hire a lawyer who specializes in franchise law to help you through the contract process. Additionally, your lawyer can help you analyze the franchisor’s Uniform Franchise Offering Circular (UFOC) to make sure there aren’t any red flags.

Important Questions to Ask

Although you should always ask any question that relates to your specific situation, this list covers a few that should be asked during any franchise negotiations:

  • How many franchises do you have?
  • How many are profitable and how many have failed?
  • What were the characteristics of the most successful franchises? The failures?
  • Is there an evaluation
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  • How many contracts are terminated or not renewed?
  • Is the franchisor financially stable?
  • What are all of the costs involved with starting a franchise? What are the ongoing costs?
  • How much of a cash reserve should I have?
  • Are there any known technology or equipment upgrades that will increase my costs?
  • When do most franchises break even and start to turn a profit?
  • What is the expected profit margin for a new franchise?
  • What is the level of demand for the franchise product or services in my area?
  • Is my franchise guaranteed a certain territory?
  • How close to my franchise can another branch open?
  • How will the franchisor help if I experience difficulties?
  • How will the franchisor help me locate customers?
  • Is there an approval process if I sell my franchise?

Where Can I Find a Franchise?

Now that you understand the definition of franchise, you may be ready to start a new business. If you’ve decided on a specific franchise, contact the parent company directly. For entrepreneurs who are still in the early decision-making process, there are many online franchise listing services that can provide available opportunities along with more information. A few of these sites include:

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