Franchising... is it for me?

Franchising is a method of doing business wherein a franchisor licenses trademarks and tried and proven methods of doing business to a franchisee in exchange for a recurring payment, and usually a percentage of gross sales or gross profits as well as the annual fees. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor, and may indeed be required by the franchisor, which generally requires audited books, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights.

A business operated under a franchise arrangement is often called a chain store, franchise outlet, or simply franchise.

Here are a few differences between franchises and other business opportunities:

A franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor's system of doing business and sell its products or services.
In addition to a well-known brand name, buying a franchise offers many other advantages that aren't available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error.
Reputable franchisors conduct market research before selling a new outlet, so you'll feel greater confidence that there is a demand for the product or service. Failure to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchisee, it's all done for you. The franchisor also provides you a clear picture of the competition and how to differentiate yourself from them.
Finally, franchisees enjoy the benefit of strength in numbers. You'll gain from economics of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms. By comparison, independent operators have to negotiate on their own, usually getting less favorable terms. Some suppliers won't deal with new businesses or will reject your business because your account is not big enough.
Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn't easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.
A business opportunity doesn't generally feature the seller's trademark; buyers operate under his or her own name.
Business opportunities tend to be less expensive than franchises and generally don't charge ongoing royalty fees.
Business opportunities allow buyers to proceed with no restrictions as to geographic market and operations.
Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.
The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.
For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on.

The Advantages

Reduction of risk
Sales and marketing assistance
Standardized products and systems
Point-of-sale advertising
Standardized financial and accounting systems
Collective buying power
Supervision and consulting readily available
National and local advertising programs
Uniform packaging
Ongoing research and development
Financial assistance
Site selection guidance
Operations manual provided

Also know that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.

The Disadvantages

Loss of control
A binding contract
The franchisor's problems are also your problems

If you're considering buying a franchise, don't let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don't allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you'll realistically be able to pay yourself.

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can range anywhere from $4,000 to $20,000 and, in some cases, up to $50,000. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 3 to 8 percent.

Some of the other costs associated with a franchise include:

Facility/Location
Equipment
Signs
Opening Inventory
Working Capital
Advertising Fees

Franchisors should supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money. This is a "cooling-off' period intended to prevent franchisees from jumping in without carefully reviewing and considering what they're doing.

Furthermore, the franchisee must be provided with completed contracts covering all material points at least five days prior to the actual date of execution of the documents. Again, this provides another cooling-off period and the chance to have an attorney review the contracts prior to execution.

Visit the FTC's Franchise and Business website to find out more about the Franchise Rule.

Check out the resources below to help you find more information on the opportunities that interest you:

Franchise 500

Fastest-Growing Franchises