COME AND JOIN J-STAR FRANCHISE
WHAT IS A FRANCHISE?
A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.
Technically, the contract binding the two parties is the “franchise,” but that term more commonly refers to the actual business that the franchisee operates. The practice of creating and distributing the brand and franchise system is most often referred to as franchising. There are two different types of franchising relationships. Business Format Franchising is the type most identifiable. In a business format franchise, the franchiser provides to the franchisee not just its trade name, products and services, but an entire system for operating the business. The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchiser. While less identified with franchising, traditional or product distribution franchising is larger in total sales than business format franchising. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturing industries.
Franchising Is About Relationships
Many people, when they think of franchising, focus first on the law. While the law is certainly important, it is not the central thing to understand about franchising.
At its core, franchising is about the franchiser’s brand value, how the franchiser supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system’s brand standards and most importantly – franchising is about the relationship that the franchiser has with its franchisees.
Franchising Is About Brands
A franchiser’s brand is its most valuable asset and consumers decide which business to shop at and how often to frequent that business based on what they know, or think they know, about the brand. To a certain extent consumers really don’t care who owns the business so long as their brand expectations are met. If you become a franchisee, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them. But first and foremost, they have trust in the brand to meet their expectations, and the franchiser and the other franchisees in the system rely upon you to meet those expectations.
Franchising Is About Systems and Support
Some of the more common services that franchisers provide to franchisees include:
You want to select a franchiser that routinely and effectively enforces system standards. This is important to you as enforcement of brand standards by the franchiser is meant to protect franchisees from the possible bad acts of other franchisees that share the brand with them. Since customers see franchise systems as a branded chain of operations, great products and services delivered by one franchisee benefits the entire system. The opposite is also true. A recognized brand name, Site selection and site development assistance, Training for you and your management team, Research and development of new products and services, Headquarters and field support, Initial and continuing marketing and advertising.
Franchising Is also a Contractual Relationship
While from the public’s vantage point, franchises look like any other chain of branded businesses, they are very different. In a franchise system, the owner of the brand does not manage and operate the locations that serve consumers their products and services on a day-to-day basis. Serving the consumer is the role and responsibility of the franchisee.
Franchising is a contractual relationship between a licencor (franchiser) and a licensee (franchisee) that allows the business owner to use the licencor’s brand and method of doing business to distribute products or services to consumers. While every franchise is a license, not every license is a franchise under the law. Sometimes that can be very confusing.
In the United States, a franchise is a specific type of licensing arrangement defined by the Federal Trade Commission and also by several states. In the United States a franchise generally exists when:
- The franchiser licenses a franchisee the right to use its trade or service mark;
- To identify the franchisee’s business in marketing a product or service using the franchiser’s operating methods;
- The franchiser provides the franchisee with support and exercises certain controls; and,
- The franchisee pays the franchiser a fee.
The definition of a franchise is not uniform in every state. Some states for example, may also include a marketing plan or community of interest provision in the definition. The definition of what is a franchise can vary significantly under the laws in some states and it is important that you don’t simply rely on the federal definition of a franchise in understanding any particular state’s requirements.
Put another way, in a franchise a business (the franchiser) licenses its trade name (the brand, such as Bright Star Care or Sport Clips) and its operating methods (its system of doing business) to a person or group operating within a specific territory or location (the franchisee), which agrees to operate its business according to the terms of a contract (the franchising agreement). The franchiser provides the franchisee with franchising leadership and support, and exercises some controls to ensure the franchisee’s adherence to brand guidelines.
In exchange, the franchisee usually pays the franchiser a one-time initial fee (the franchise fee) and a continuing fee (known as a royalty) for the use of the franchiser’s trade name and operating methods. The franchisee is responsible for the day-to-day management of its independently owned business and benefits or risks loss based on his own performance and capabilities.
Investing in a franchise or becoming a franchiser can be a great opportunity. But before you select any franchise investment and sign any franchise agreement, do your homework, understand what the franchise system is offering and get the support of a qualified franchise lawyer.
IS A FRANCHISE A GOOD WAY TO START YOUR OWN BUSINESS?
There are typically three paths to going into business for yourself: starting a new business, buying a new franchise, or purchasing an existing franchise. Each option carries pros and cons, which we have outlined below.
To summarize, starting your own business can be a more affordable, flexible option, but often requires significantly more effort and carries a higher risk of failure. Purchasing a franchise comes with significant brand and business support from the franchisor, although your costs are generally higher and you cede some operational independence to the franchisor.
PROS AND CONS OF STARTING A NEW BUSINESS
- Typically lower start-up cost
- Independence and creative freedom
- No inherited problems from an existing business
- Requires more time and energy
- Higher risk of failure
- Takes longer to become profitable
- Financing may be more difficult to obtain
PROS AND CONS OF BUYING A NEW FRANCHISE:
- Reduced risk of failure over an independent business
- Proven methods and products
- Start-up assistance
- On-going training and support
- Local, regional, and national advertising
- Collective purchasing power
- Research and development
- Higher costs (fees, royalties, supplies)
- Smaller profit margins
- Lack of independence and freedom
- Difficult to achieve redress if franchiser fails to meet obligations
- A franchiser’s problem may become your problem
- Association and synergy with other franchisees
- Easier to obtain financing.
PROS AND CONS OF BUYING AN EXISTING FRANCHISE
- The business is already up and running
- Risk and uncertainty are reduced
- The basic infrastructure is in place:
- Established location
- Existing customers and reputation
- Policies and procedures
- Cash flow
- No start-up period, leading to quicker profitability
- Easier to obtain financing
- Tangible limitations:
- Design problems
- Location problems
- Merchandise problems
- Intangible limitations:
- Customer or employee ill-will
- Pricing problems
- Inadequate procedures
- Lease problems
- Potentially higher costs to buy
- Legal liability in inheriting lawsuits