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Franchises
Summary
Many people think that buying a
franchise is a guarantee of success
and a high income. It is not.
Individual franchises fail all the
time, although many franchisors
would have you believe that 98% of
them are successful. Frequently,
disputes arise with contracts,
protected territories, the parent
company charging inflated prices for
products that franchisees must buy
from them, advertising campaigns
that franchisees may not approve,
and other issues. That's why in many
industries, franchise owner
associations have been formed. This
is true for a company such as Weight
Watchers, for example.
For franchisees, the main
disadvantage of franchising is a
loss of control. While they gain the
use of a system, trademarks,
assistance, training, marketing, the
franchisee is required to follow the
system and get approval for changes
from the franchisor. For these
reasons, franchisees and
entrepreneurs
are very different. The United
States Office of Advocacy of the SBA
indicates that a franchisee "is
merely a temporary business
investment where he may be one of
several investors during the
lifetime of the franchise. In other
words, he is "renting or leasing"
the opportunity, not "buying a
business for the purpose of true
ownership."
In addition, it is critical for
a prospective franchise buyer to
carefully examine the fine print of
the UFOC (Uniform Franchise Offering
Circular), a document that must be
filed in more than 14 states. This
UFOC provides details on the
business, the parent company and its
audited finances, how the system
works, fees and investment to
expect, responsibilities of the
franchisor and franchisee, and a
list of franchise owners.
A prospective buyer should read
this thoroughly, ask questions of
the parent company, go over it with
his/her attorney and accountant, and
call some current and former
franchise owners to see how
satisfied they are/were with the
system.
In the past, franchisors made
earnings claims, which were often
unrealistic. Nowadays, earnings
claims are rarely made. Rather,
UFOCs may include the average gross
revenues for low, mid-range, and
best-performing franchises.
One can obtain a company's UFOC by
filling out an application with the
company and going through an
interview, or they can purchase the
latest annual UFOC from a service
such as Frandata. The complete
document usually costs about $200
and can be emailed as a pdf.
Frandata (800-485-9570)
www.frandata.com
Modern franchising came
to prominence with the rise of franchise-based food service
establishments. This trend started before 1933 with quick service
restaurants such as
A&W Root Beer.[5]
In 1935,
Howard Deering Johnson teamed up
with Reginald Sprague to establish the first modern restaurant
franchise.
[6]
[7] The idea was to let
independent operators use the same name, food, supplies, logo and
even building design in exchange for a fee.
The growth in franchises picked up
steam in the 1930s when such chains as
Howard Johnson's started franchising motels.[8]
The 1950s saw a boom of franchise chains in conjunction with the development of
the U.S.
interstate highway system.[9]
Fast food restaurants, diners and motel chains
exploded. In regard to contemporary franchise chains,
McDonalds is unarguably the most successful
worldwide with more restaurant units than any other franchise network.
According to Franchising in the
Economy, 1991-1993, a study done by the
University of Louisville, franchising helped to
lead America out of its economic downturn at the time.[1]Franchising
is a unique business model that has encouraged the growth of franchised chain
formula units because the franchisors collect royalties on the gross sales of
these units and not on the profits. Conversely, when good jobs are lost in the
economy, franchising picks up because potential franchisees are looking to buy
jobs and to earn profits from the purchase of franchise rights. The manager of
the United States
Small Business Administration's Franchise
Registry concludes that franchising there is continuing to grow and that
franchising is growing in the national economy.
[10]
Businesses for which franchises is
said to works best have the following characteristics
-
Businesses with a good track
record of profitability.
-
Businesses built around a unique
or unusual concept.
-
Businesses with broad geographic
appeal.
-
Businesses which are relatively
easy to operate.
-
Businesses which are relatively
inexpensive to operate.
-
Businesses which are easily
duplicated
As practiced in
retailing, franchising offers franchisees the
advantage of starting up a new business quickly based on a proven trademark and
formula of doing business, as opposed to having to build a new business and
brand from scratch (often in the face of aggressive competition from franchise
operators). A well run franchise would offer a
turnkey business: from site selection to lease
negotiation, training, mentoring and ongoing support as well as statutory
requirements and troubleshooting.
FRANCHISE information sources
Entreprenuer's Franchise 500
An excellent magazine for franchise
information and an annual ranking called the "Franchise 500" is Entrepreneur
magazine. This annual directory classifies popular franchises by type of
business and gives the number of franchised units, company owned units, required
franchise fee and total start-up costs, royalty percentage, and company address
and phone. It also does a ranking of the fastest-growing and most affordable
fracnhises.
Here are some other useful
sources to check out:
http://www.frandata.com (franchise offering
circular data)
franchisedoc.com (The Franchise Doctor, how to
evaluate franchises)
http://www.franchise.org/ (The Intl. Franchise Assn., variety of
resources)
http://www.frannet.com/ (advice on how/why to
build a franchise, listings)
http://www.franchise1.com/ (The Franchise Handbook Online)
www.ftc.gov/bcp/franchise/netrule.htm (FTC rules, rights,
regulations)
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