Many people dream of being an entrepreneur. By purchasing a franchise, you often can
sell goods and services that have instant name recognition and can obtain training and
ongoing support to help you succeed. But be cautious. Like any investment, purchasing a
franchise is not a guarantee of success.
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The Benefits and Responsibilities of Franchise Ownership
This article can help you evaluate whether owning a franchise is
right for you. It will help you understand how franchises work,
including your obligations as a franchise owner.
A franchise typically enables you, the investor or "franchisee," to operate a
business. By paying a franchise fee, which may cost several thousand dollars, you are
given a format or system developed by the company ("franchisor"), the right to
use the franchisor's name for a limited time, and assistance. For example, the franchisor
may help you find a location for your outlet; provide initial training and an operating
manual; and advise you on management, marketing, or personnel. Some franchisors offer
ongoing support such as monthly newsletters, a toll free 800 telephone number for
technical assistance, and periodic workshops or seminars.
While buying a franchise may reduce your investment risk by enabling you to associate
with an established company, it can be costly. You also may be required to relinquish
significant control over your business, while taking on contractual obligations with the
franchisor.
Below is an outline of several components of a typical franchise system. Consider each
carefully.
The Costs Associated with Purchasing a Franchise
In exchange for obtaining the right to use the franchisor's name and its assistance, you
may pay some or all of the following fees.
Initial Franchise Fee and Other Expenses. Your initial franchise fee, which may
be non-refundable, may cost several thousand to several hundred thousand dollars. You may
also incur significant costs to rent, build, and equip an outlet and to purchase initial
inventory. Other costs include operating licenses and insurance. You also may be required
to pay a "grand opening" fee to the franchisor to promote your new outlet.
Continuing Royalty Payments. You may have to pay the
franchisor royalties based on a percentage of your weekly or monthly
gross income. You often must pay royalties even if your outlet
has not earned significant income during that time. In addition,
royalties usually are paid for the right to use the franchisor's
name. So even if the franchisor fails to provide promised support
services, you still may have to pay royalties for the duration
of your franchise agreement.
Advertising Fees. You may have to pay into an advertising
fund. Some portion of the advertising fees may go for national
advertising or to attract new franchise owners, but not to target
your particular outlet.
Franchise Controls
To ensure uniformity, franchisors typically control how franchisees conduct business.
These controls may significantly restrict your ability to exercise your own business
judgment. The following are typical examples of such controls.
Site Approval. Many franchisors pre-approve sites for
outlets. This may increase the likelihood that your outlet will
attract customers. The franchisor, however, may not approve the
site you want.
Design or Appearance Atandards. Franchisors may impose
design or appearance standards to ensure customers receive the
same quality of goods and services in each outlet. Some franchisors
require periodic renovations or seasonal design changes. Complying
with these standards may increase your costs.
Restrictions on Goods and Services Offered for Sale.
Franchisors may restrict the goods and services offered for sale.
For example, as a restaurant franchise owner, you may not be able
to add to your menu popular items or delete items that are unpopular.
Similarly, as an automobile transmission repair franchise owner,
you might not be able to perform other types of automotive work,
such as brake or electrical system repairs.
Restrictions on Method of Operation. Franchisors may
require you to operate in a particular manner. The franchisor
might require you to operate during certain hours, use only pre-approved
signs, employee uniforms, and advertisements, or abide by certain
accounting or bookkeeping procedures. These restrictions may impede
you from operating your outlet as you deem best. The franchisor
also may require you to purchase supplies only from an approved
supplier, even if you can buy similar goods elsewhere at a lower
cost.
Restrictions of Sales Area. Franchisors may limit your
business to a specific territory. While these territorial restrictions
may ensure that other franchisees will not compete with you for
the same customers, they could impede your ability to open additional
outlets or move to a more profitable location.
Terminations and Renewal
You can lose the right to your franchise if you breach the franchise contract. In
addition, the franchise contract is for a limited time; there is no guarantee that you
will be able to renew it.
Franchise Terminations. A franchisor can end your franchise
agreement if, for example, you fail to pay royalties or abide
by performance standards and sales restrictions. If your franchise
is terminated, you may lose your investment.
Renewals. Franchise agreements typically run for 15
to 20 years. After that time, the franchisor may decline to renew
your contract. Also be aware that renewals need not provide the
original terms and conditions. The franchisor may raise the royalty
payments, or impose new design standards and sales restrictions.
Your previous territory may be reduced, possibly resulting in
more competition from company-owned outlets or other franchisees.
Want to Learn about Franchise Opportunities?
Browse tons of franchise opportunities in the Gaebler Ventures franchise directory:
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