Franchises

Franchises are quite popular and some consumers may want to open this type of business. In How to Open a Franchise Business, Mike Powers says that franchises have a greater chance of success than either purchased businesses or those started from scratch. Franchises offer a proven type of business. People patronize them because their products are recognized and trusted, and they have a larger customer base because of name recognition. Many franchisers also provide training in start-up, running, and marketing the business; training for updating the skills of franchise owners and employees; supply record keeping systems; and conduct advertising and marketing campaigns on behalf of all franchisees. Some sell supplies to franchisees at reduced costs, and some can finance or arrange financing for franchisees. 

As with everything franchising has a downside. Franchises tend to require more research than starting a business from scratch because both the market and the franchise itself need to be evaluated. Generally, they are more expensive to open, typically requiring an investment of $20,000 or more. Many cost quite a bit more - in the $100,000 to $300,000 range. The franchise owner answers to customers and to the franchiser and must operate his or her business according to the terms specified in the franchise agreement. This may mean that the business's location and exterior/interior design, product mix and prices, work attire, and advertising are under the franchiser's, not the franchisee's, control. The franchisee may be required to regularly file financial reports and be subject to inspection and audits. Also, the franchisee makes regular payments to the franchiser. 

In a franchise arrangement the franchiser and franchisee develop a binding agreement that is renewed periodically. There are many steps to take before this occurs and the business opens. Most are the same steps one takes to open a business from scratch and none should be bypassed. They include:

• Research industries and types of franchise arrangements for those industries
• Conduct a self-evaluation
• Identify and evaluate possible franchisers and their franchise systems
• Evaluate franchiser's products
• Contact and visit other franchisees
• Identify the market and evaluate its income potential
• Identify opening and operational expenses and develop income projections

Because franchise agreements are written to protect the franchiser, it is necessary to hire a lawyer with franchise expertise. He or she will explain and negotiate the franchise agreement and may recommend changes. The lawyer also can provide expertise on state and federal regulations, can negotiate and develop leases, and can deal with any other legal arrangements required for opening a business. Hiring an accountant is also a good idea because the financial statements and reporting requirements for a franchise usually are more complex and rigorous than those for a from-scratch business. The accountant will prepare financial statements, evaluate business costs, and work with the franchiser's accounting system.

Chapter 7, "Resources and Resource Partners" lists books and worldwide web pages on franchising. The individual interested in opening a franchise should read and refer to these resources, which provide detailed discussions and tips on franchising, the purpose of the franchise offering circular, and rules and regulations governing franchising. They also list questions to ask and answer while researching franchises, provide lists of franchise associations, and discuss the franchiser/franchisee relationship.

Chapter 6 Business Plan Study Guide: Franchises

1. Franchises have a greater chance of success than businesses started from scratch. 
   T_____ F_____ 
   
   
2. Because they are an already established business type, franchises tend to require less research than starting a business from scratch.
   T_____ F_____ 
   
   
3. The cost of starting a franchise is pretty reasonable, and within the reach of most consumers of VR services who might want to start a business. 
   T_____ F_____ 
   
   
4. The franchisee essentially has two bosses. They are _____________ and _____________.
   
   
5. In researching a franchise the ______________ and the _____________ need to be evaluated.

Study Guide Answers: Chapter 6 - Franchises

© July 1998, 1st Revision June 1999, 2nd Revision February 2001