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Introduction to Franchises

Simply put, Franchising is a partnership relationship.  As a small business owner, you have to decide if you truly want to be in a relationship with an authority in your business operation.  This can be a mutually beneficial arrangement or a nightmare from day one.

This series is designed to help you: first, understand what a franchise is, secondly, determine if franchising is for you, third, generate a plan to get into a franchise, and finally, learn the nuances of franchising from the financial to the contractual.

Right now, you are either a small operating business or you are considering going into business.  You are asking yourself a lot of questions, and one of those questions is ‘Is a franchise for me?’  Well, you need to understand what a franchise is before determining whether it is a good choice for you.

The spirit of owning a business is what drives most entrepreneurs.  Knowing that they generated the concept, developed the plan, and created the business is what gives them the pride of ownership.  However, most folks do not have the ability to develop a plan and carry out the plan to see the new operation to success.  That is where franchising comes into play.  A relationship is created where an organization becomes a mentor, a full knowledge resource, and you are the student or apprentice.

The mentor provides the knowledge and the apprentice provides the enthusiasm to carry out the plan.  In exchange for this relationship, the apprentice agrees to compensate the mentor, franchiser, a fee and/or a percentage of the revenue in the future for this up front information and guidance.  The advantages are impressive and include:

  • Greater chance of success for the new business owner
  • Higher standard of quality in the product/environment/service delivered to the customer
  • A learning curve that is as shallow as possible
  • A name that is recognized in the community, region, and possibly nationwide

Now for the drawbacks of this relationship, note how I describe this as a relationship.  Similar to a marriage, you get out of it what you put into this arrangement.  This is a true business partnership.  You become bounded to the franchiser in a mutual covenant.  The franchiser provides an immense amount of help up front and you the franchisee return this favor over time.  It is bounded by a formal agreement called a franchise agreement.  You need to fully understand this agreement.  That is why the Federal Trade Commission requires that the franchiser provides this agreement to you for several days prior to signing.  It gives the potential franchisee an opportunity to comprehend the relationship prior to commencement.

So, what have you learned?

  1. A franchise is a partnership relationship between two parties.  The franchiser provides a knowledge base of information and help for a franchisee to start a business.
  2. This relationship is bounded by a formal document called the ‘Franchise Agreement
  3. The franchisee becomes beholden to the franchiser over a lengthy period of time to repay the franchiser for the upfront mentoring and for the use of the recognized name.

Now that you have some understanding of what a franchise is, you need to determine if this is right for you.   We’ll explore this in my next article in the section dealing with franchise operations.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

 

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About David J Hoare (380 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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