What is Franchising?

Franchising is a business method for providing services and/or distributing products. To have a franchise, a business owner (“Franchisor”) establishes their trademarks and business system. The buyer (“Franchisee”) signs a contract (the “franchise agreement”), pays an initial fee and ongoing royalty to purchase the rights to operate the business within a certain area using the Franchisor’s trademark and system.

Franchising involves concessions by both the Franchisor and the Franchisee. The Franchisor must trust that each Franchisee will operate its specific business according to the Franchisor’s standards while also providing valuable support to Franchisees. The Franchisee, in turn, agrees to operate the business according to the Franchisor’s guidance and to pay the Franchisor ongoing fees, called royalties, for the continued use of the trademark and business system.

How Does a Business Become a Franchise?

Generally, most businesses start the path to franchising because a customer has shown interest in opening the business somewhere else. Once the business owner has decided to franchise their business, they must work with a franchise attorney to help create the Franchise Disclosure Document (FDD). The FDD is a legal document that must follow guidelines imposed by the Federal Trade Commission. Additionally, some states have their own legal requirements that must be met before a Franchisor can offer or sell a franchise in that particular state.

Preparation of an FDD can take several months and, in many instances, requires additional supplemental documents such as an operations manual and audited financial statements for the Franchisor. Once this FDD, and any necessary supplemental documents, are prepared then the Franchisor is ready to start offering franchises to potential Franchisees.

How Does Someone Become a Franchisee?

Buying a franchise can be an overwhelming process because there are over 100 industries that have franchised business models. Someone interested in buying a franchise can find franchises through various nationwide trade shows, franchise specific websites and franchise sales organizations.

When someone is looking for a franchise, they need to consider their specific skills, their short-term and long-term goals with the business, their financial needs and how much they can afford to spend. Although there are franchises for almost any budget, the profitability can vary from franchise to franchise drastically. After a potential Franchisee has determined what type of business they are interested in and their budget, they should start researching the different franchises available for that industry. In some instances, like restaurants, there are dozens of franchises that have similar products or services. It is up to the Franchisee to determine which franchise model appeals to them, is affordable, and could work best in their specific region.

Once all of these tasks are done, the Franchisor can provide the potential buyer with an FDD. After a required 14-day waiting period, the potential buyer has the opportunity to sign a franchise agreement and become a Franchisee. Although this is a milestone for both Franchisor and Franchisee, it is only the start of a long (normally 10 years or more) and mutually beneficial relationship.

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