Franchising 101

Franchising 101

  • 22 Apr 2016
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Have you been longing to make a career change, but haven’t taken the necessary steps because you don’t know the options that stand before you? Well, there are plenty of vehicles to success that may be the right fit for your income, lifestyle, and wealth goals and the future you envision for yourself. Do you want to spend more time with your family? Do you want to be your own boss? Do you wish to live a more comfortable lifestyle? If yes to any of these, then franchising may be the great way for you to attain the success you desire.

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Franchising is one of the largest and most profitable industries in the U.S. In 2015, the franchise sector is predicted to grow at a faster pace than the rest of the economy. Why wouldn’t you want to capitalize on the franchise sector’s great development potential as a route to self-sufficiency?

However, franchising is vast and can be complex, so it’s important to have an understanding of the basics of the franchise industry before taking the leap of faith. Today, I will review the basics of the franchising industry that all aspiring franchisees should have a grasp of before investing in a franchise opportunity.

Franchising 101

Q: What’s franchising?
A: According to the U.S. Small Business Association (SBA), franchising is a way of doing business. A franchise brand and an aspiring franchisee or entrepreneur sign an agreement in which licenses, trademarks or systems are invested in for use by the aspiring entrepreneur. The key to franchised businesses is that they have proven business models in place with established systems and processes which makes them replicable and duplicable. There are thousands of different franchise concepts in the marketplace today in over 70 different industry sectors (restaurants, personal care, automotive etc.)

Q: Who’s a franchisee?
You are the franchisee. A franchisee is the individual in the franchise agreement who purchases the right to operate the business under the franchisors name by using their licenses, trademarks, methods, procedures and/or systems.

Q: Who’s a franchisor?
A: The franchisor is the parent company that grants the franchisee the right to use the licenses, trademarks, methods, procedures and/or systems.

Q: How much does a franchise cost?
A: Depending on the specific type of franchise that an aspiring franchisee is looking to invest in, costs vary greatly. Some can cost as low as $10,000, however some franchises can cost up to $5 million. All franchise systems have a franchise disclosure document (FDD) that can be made available to those interested in an available franchise opportunity. This document outlines the franchise agreement and terms of the agreement in a list of items, including all of the associated costs. There are three main costs that franchisees typically pay to the franchisor:

Franchise Fee: This can be found in Item 5 and is a one-time fee. The franchise fee is the amount of money that a franchisee pays to the franchisor initially to virtually “buy into” the franchise system.

Initial Investment: This can be found in Item 7 of the FDD and outlines the costs that the franchisee will need to pay in order to open and get it off the ground and running. Necessities such as real estate, equipment purchases and business licenses are factored into this cost.

Royalty fee: The majority of franchisors have their franchisees pay them a recurring royalty fee, on a weekly, monthly or yearly basis. These royalties are typically total to a certain percentage of the franchise location’s gross sales.

Do franchisees receive any support?
A: Franchisors provide continual guidance and support to their franchisees. Franchisees pay their franchisor a royalty fee in their agreement to use their properties, so franchisors only succeed when their franchisees succeed. Franchising is a great alternative for individual aspiring to become self-sufficient but don’t completely want to be in their business alone.

Do I have to work in my franchise full-time?
A: Most franchisees do work in their franchise as a full-time position – trading in their previous 9-5 job for complete franchise ownership. However some franchise brands offer semi-absentee franchise ownership option in which the franchisees typically works 10-15 hours a week in their franchise once it’s up and running.



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