What is Franchising?
Franchising is a practice where a corporation allows an other entity to use the company’s already successful business model. The franchisor (the company that provides the business solution) and the franchisee (the entity that uses it) enter into a contract to use and capitalize on the company’s successful business model and/or it’s existing brand awareness (most often called Goodwill) for a faster return of capital.In return, franchisees pay two payments in general. First is a one time payment, called the franchise fee, and the other is royalty fee, which is a recurring expense, for the continuous usage of the business model, advertising and training costs. Royalty is usually 3-10% of gross income.
Instead of expanding his or her business in a conventional way by opening up branch operations, the Franchisor appeals to the self-motivation of entrepreneurs willing to follow a proven blueprint and who are able to finance their own ventures. As a result, the combined strength and market recognition enjoyed by the Franchisor is coupled with the self-motivation and financial contribution of the Franchisee to create a successful network on a national or even international level.
One common misconception about franchising is the statement, “I am buying a franchise.”. You are not buying, you are capitalizing onto the business model. What you will own are the physical assets that are needed to act upon the franchise, like the building and equipment. For a business to work as a franchisor, it must have a good track record of profitability and the business system it employs is easily duplicated. Otherwise, that business is not suitable for franchising.
OBLIGATIONS OF THE PARTIES.
Each party to a franchise has several interests to protect. The “Franchisor” is involved in securing protection for the trademark, controlling the business concept and securing “Know – How”. The “Franchisee” is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the Franchisor’s signs, logos and trademark in a prominent place. The uniforms worn by the staff of the Franchisee have to be of a particular design and colour. The service has to be in accordance with the pattern followed by the Franchisor in the successful franchise operations.
EXPECTATIONS
Once you have decided on a franchise, insist on receiving a disclosure document a requirement that is now enshrined in the “Consumer Protection Act“. Ask the franchisor to explain the disclosure document, contract and operations manual, but also have them scrutinized by your professional advisors. Listen to their comments and clarify any queries you may have with the franchisor before committing to the deal. Do not enter into any commitment or pay any fees until you are absolutely certain that this is what you really want.
To maximize your chances of success, take notice of the following:-
- Don’t rush your decision or buy the first franchise that appeals to you.
- Do your homework before committing to a contract.
- Wait until you have obtained satisfactory answers to all your questions.
- Be 100% sure that franchising is right for you and that you are right for franchising.
- Make use of the 14 day cooling-off period provided for in the CPA.
- Don’t pay any deposits until you are satisfied with the agreement, know how it will be spent and how, if necessary, it will be refunded if you choose not to proceed.
- Have the contract reviewed by a lawyer who is familiar with franchising and heed their advice.
- If you need financial assistance make sure that you use a professional business plan consultant that knows the franchising industry.
When buying a franchise, you are entering into a long term business relationship and it is imperative that you take the time to assess the background and performance of your prospective partner. A good franchisor will want you to be happy and confident that you are making the right decision and should therefore welcome your enquiries as evidence of your good sense.
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