Franchise FAQs

Are the "look-alike" characteristics of franchises a disadvantage? don't consumers want variety?

Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the "franchise," but that term is often used to mean the actual business that the franchisee operates.

Are there any current trends in franchising?

Among the most important trends in franchising today are the internationalization of franchising,the emergence of women and minorities in franchising, and the increased use of technology. Allof these have profound and positive effects on franchising and make it an even more dynamic methodof doing business today.

International Franchising

• Franchised businesses continue to grow in all corners of the world. Domestic franchisorsin many countries are increasingly establishing franchises across borders.More than 400 U.S.franchise systems operate internationally. International franchising has been successfulbecause consumers around the world recognize famous brands as symbols of quality, consistency,service, and value.
• If you are considering the purchase of a franchise, you may want to not limit the scope ofyour search to franchisors in your home country.  Increasingly, franchisors are seekingfranchisees internationally, and a foreign-based franchisor may provide you with the franchisedopportunity you are seeking.
• In many cases, foreign-based franchisors offer individual franchises to operate a single unit.They also often offer development rights to operate multiple units and "master franchise" rights. The latter is, essentially, an opportunity to be the "franchisor" for the foreign-based concept in your country or a portion of your country.
• Of course, international franchising presents some different challenges than domestic franchising.For example, if goods will come from overseas, you may need to be aware of various duties,tariffs, and transportation requirements.  You also need to consider language andcultural differences.  For instance, if you are a franchisee in a different country from the franchisor's home office, the franchisor's system may need to be modified for use in your country.

• Increasing numbers of minorities and women are discovering that franchising can be a good opportunity for everybody.  While franchising is not a panacea, it provides a means for mitigating the traditional obstacles that otherwise competent and capable small investors, particularly women and minorities, face: lack of business experience and capital.Franchisors provide managerial training and assistance on an on-going basis and, in some cases, arrange for property leases, provide equipment financing and sale-leaseback programs,and assist franchisees in obtaining financing.
• As a result of a strong economy, women are increasingly in leadership positions in franchising whether through establishing new companies, becoming single and multi-unit franchisees, or having high-level positions at corporate headquarters.
• According to the Center for Women's Business Research, as of 2004, there are an estimated 10.6 million privately-held, 50% or more women-owned firms in the U.S., accounting for nearly half (47.7%) of all privately-held firms in the country.   These firms employ 19.1 million people, and generate $2.46 trillion in sales.
• As the population of minorities in the U.S. population continues to rise, minority franchisingin cities is expected to rise.
• IFA's Minorities in Franchising Committee and the IFA Educational Foundation's Diversity Institute provides research, education, and outreach programs to expand the opportunities for minorities in franchising.
• IFA's Women's Franchise Committee (WFC) is dedicated to inspiring and encouraging women in franchising by creating a network of business professionals dedicated to strengthening the success of women in franchising.  The WFC has created a number of programs and resources in order to achieve this goal, ranging from "how to" guides and conferences to local networking chapters.

There are several trends related to the use of technology in franchising today.

1. First, many franchisors use the internet to communicate with franchise owners and suppliers through secure extranets in order to share critical information, facilitate discussion among the franchise network, post operations manuals and updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales reports automatically and without the need for more labor-intensive data entry.
2. Second, franchisors use the internet to advertise their network to customers.
3. Third, some franchisors use the internet to engage in business-to-consumer (B2C) e-commerce, often with the involvement of franchisees.
4. Fourth, many prospective franchisees glean information and make contact with franchisorsusing the internet.  Some franchisors nowreport that they get more sales leads from the internet than from any other source.
5. Fifth, some franchisors have started providing disclosures to prospective franchisees by electronic means.
6. Sixth, and finally, franchisors make extensive use of technology in offering their services directly to consumers -- such as networks of businesses that offer website design and web hosting.  The prospects for, and reality of, involving technology in franchising make this a very exciting time to own a franchised business.

Are there any other laws which protect me?

Fourteen states require franchise companies to file or register their franchise offeringswith a state agency: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota,New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.These states, plus Oregon, also have disclosure regulations similar to those of the FederalTrade Commission. By means of so-called "business opportunity laws," certainother states regulate the offer and sale of a "business opportunity" which mayinclude the offering of a franchise under the state's definition of a "businessopportunity."

How can I be sure I won't lose money or is my investment guaranteed?

No one can be 100 percent sure. Although the majority of franchisees are satisfied,successful business people, some do suffer financial losses. That's why you must beparticularly wary of any company which "guarantees" profit or certain success.If you hear a claim about a company that sounds too good to be true, it probably is.Investigation of all earnings claims made by a franchisor is especially important. But,regardless of earnings claims, you must recognize that your success can come only throughhard work. Success or failure ultimately depends on you.

How can I be sure that the information provided in the disclosure document is truthful and accurate?

Even though inaccuracy and misrepresentation carry civil and sometimes severe criminal penalties,there is no way to be absolutely sure. The disclosure document makes fraud and deception less likely.However, because the franchisor has -- under penalty of law -- answered in written (or electronic)form a variety of very important questions you can use to judge the offer, IFA recommends that youcarefully consider the information provided and evaluate the materials, including the history andreputation of the company and its officers, with the assistance of your lawyer and accountant.Also, be absolutely sure you talk to a substantial number of others who have already obtainedfranchises from the company you're considering, and ask them to verify any information you question.Learn if they are "satisfied customers" of the franchisor.

How does a franchised chain start?

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations. At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she may decide to "franchise" the store name and business system to an independent business person known as a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.

How widespread is franchising?

The answer may surprise you. By 2001, there were 767,483 business establishments in all domestic franchise systems (either owned by franchisors and franchisees), which employed almost 10 million people, with direct output close to $625 billion, and a payroll of $230 billion. These establishments account for significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table/full service restaurants.

If I want to buy a franchise, what should I do to get started?

The first thing to do is to identify companies offering franchises. IFA's Franchise Opportunities Guide gives a comprehensive list of franchise companies in more than 75kinds of businesses. The Guide, which costs $25.00 (including shipping and handling),is available by mailing a request and check or money order to IFA Publications, P.O. Box 1020, Sewickley, PA 15143. Orders may also be placed by calling 1-800-543-1038, or visiting IFA'sonline bookstore at www.franchise.org, where you can find other relevant sources to assistin your decision to buy a franchise. The Guide is also available online at the IFA website www.franchise.org.

You should contact the companies directly, and "shop wisely." "Shopping wisely" requiresthat you determine how much you can afford to invest and where to obtain financing.Careful investigation prior to purchasing a franchise also necessitates understandingthe UFOC. You need to examine what the franchise relationship entails. For instance,you need to inquire into the training and support provided, assistance in finding anddeveloping a location, and the sources of inventory and supplies. You should researchthe companies' growth and prospects for future growth. You should also seek advicefrom professionals and business people you respect. By shopping wisely, you can makean informed decision on whether to purchase the franchise.

Specifically, what kinds of businesses lend themselves to franchising?

Virtually every business form you can imagine. The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z, from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.

What are some of the drawbacks of owning a franchise?

In exchange for the security, training, and marketing power of the franchise trademark,you must be able and willing to give up some of your independence. If you are a person wholikes to make most decisions on your own or to chart the course of your business alone, afranchise may not be right for you. As a franchise owner, you must comply with the variouscontrols and procedures established by the franchisor. Then, too, all successful businessesrequire a lot of dedication and plain, hard work. You must be prepared to make that commitment.

What are the major growth industries in "Business Format" franchising?

As the economy becomes more service and technology oriented, as more women enter the work force, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes. The industry categories in franchising that are expected to continue to experience rapid growth for the start of the new century are service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services; business support services including accounting, mail processing, advertising services, package wrapping and shipping, personnel and temporary help services, and printing and copying services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children's services, educational products and services, and telecommunications services. While it is important to consider industry growth before investing in a franchise, it is more important to analyze an individual franchise company's track record, keeping in mind that quick growth does not always spell success. A franchise organization that grows too quickly might not have a service team in place to support all of the units properly. Overall, long range trends indicate a steady, solid growth in business format franchising. Some will fall by the wayside, as is natural with any business, but others may well be the "household name" franchise success stories of tomorrow.

What is "Business Format" franchising?

In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. The major advantage of buying a business format franchise is that the "system," the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.*

Sales by business format franchisors continued to increase steadily throughout the 1990s and into the 21st century. In 2001, comparing business format franchising to product distribution franchising, business format franchising had about 4.3 times as many establishments, employed 4 times as many workers, generated 2.5 times the payroll, and produced nearly 3 times as much output.

*Dave Thomas and Michael Seid, Franchising for Dummies 13 (IDG Books Worldwide, Inc. 2000).

What is the federal trade commission franchise rule?

It is a federal regulation which requires franchisors to prepare an extensive disclosuredocument and to give a copy to any prospective franchise purchaser before he or she buys afranchise. The disclosure document typically used to comply with the Rule is called aUniform Franchise Offering Circular, or UFOC. Within the UFOC are many different categoriesof information about the franchise, including some of the information described in theresponse to Question 9 above. Required fees, basic investment, bankruptcy and litigationhistory of the company, how long the franchise will be in effect, a financial statement ofthe franchisor, earnings claims (if the company makes them) all are presented in thisdisclosure document. IFA recommends that both your attorney and your accountant reviewthe UFOC and your franchise agreement. For further information from the FTC, or to ordera free publication from the FTC entitled Consumer Guide to Buying a Franchise, call (202)326-2222.

What kind of investment is necessary to buy a franchise?

Investment requirements differ tremendously. It all depends on the industry and thetype of business. Total start-up costs can range from $20,000 or less, to over $1,000,000,depending on the franchise selected, and whether it is necessary to own or lease real estateto operate the business. Moreover, the initial franchise fee for most franchisors is between$10,000 and $30,000. Seventy percent of franchisors charge an inital franchise fee of $40,000or less. The average investment, excluding real estate costs, is between $350,000 -$400,000.You must discuss the inital fees and opening costs with individual companies, although IFA'sFranchise Opportunities Guide can supply general information.

What should I consider before buying a franchise?

Among the points which IFA recommends for investigation are:

• the type of experience required in the franchised business;
• a complete understanding of the business;
• the hours and personal commitment necessary to run the business;
• who the franchisor is, what its track record has been, and the business experience of its officers and directors;
• how other franchisees in the same system are doing;
• how much it's going to cost to get into the franchise;
• how much you're going to pay for the continuing right to operate the business;
• if there are any products or services you must buy from the franchisor and how and by whom they are supplied;
• the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years;
• the financial condition of the franchisor and its system. Both the Federal Trade Commission (www.ftc.gov) and IFA (www.franchise.org ) have many helpful publications and resources. Equally important, IFA recommends that you engage an attorney to examine the contract. It is important to work with an attorney who understands franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws. It is also recommended that you ask a competent accountant to examine your anticipated expenses, your financing needs, and your prospects for achieving your desired level of profitability before you sign any agreement.

When I visit a store in my area, for example, a well-known fast food restaurant, how can I tell whether that restaurant is operated by the franchisor or a franchisee?

It's difficult to tell just by visiting the restaurant. However, if it is a franchise, there should be some signage in the restaurant which indicates that the restaurant is independently owned and operated. Many companies have stores that are operated by franchisees but also have stores that are company owned and operated. So it's entirely possible that of two stores with the same name, one may be operated by a franchisee and the other operated by the company. In either case, the products, services, and quality should be the same.

Why should I be concerned whether a company is a member of the international franchise association?

Companies that belong to IFA must meet certain membership requirements. They must have asatisfactory financial condition and comply with all applicable franchise laws. In addition,all members must agree to abide by the Code of Ethics. IFA members are kept abreast of everychange in franchising laws. IFA provides continuing educational programs for members on howto conduct their businesses. They receive the latest information about topics such as improvingrelationships with franchisees, use of technology, public relations, marketing, advertising,field operations, networking and things a company with an eye to the future must know andimplement to compete in the marketplace. IFA members are committed to the future . . . tolearning . . . to succeeding.

Would I make a successful franchisee?

A successful franchisee should be suited to the industry of which he or she is a part,suited to the particular franchise company, and suited to the franchise system generally.Important questions to ask yourself include: Am I suited to the industry physically and byexperience, education, learning capacity, temperament and financial ability? What type of work is most appealing to me; for example, do I enjoy working with food, mechanical things,people, real estate, books and recordings, sporting goods, etc.? Am I prepared to work hardand take financial risks? Do my advisors, family, and friends think I am adaptable andtrainable? How do I react to controls? Am I a loner - resenting authority and restraints,or can I accept guidance and direction happily? If I prefer to act as a passive investorin the franchise, will the company accept this? How do I personally feel about the company'simage and products and services? The right answers to these types of questions help determineyour potential success as a franchisee.