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Franchises and Franchising Showcase

FRANCHISING

The term 'Franchising' describes a business model where a 'franchisor' licenses trademarks and established methods of doing business to a 'franchisee' in exchange for a recurring payment plus a percentage of gross sales or gross profits and annual fees. Advertising, training, and other support services are commonly made available by the franchisor licensing the 'chain store' or franchise outlet (often referred to as the franchise). The 'franchisor' generally requires access to and the right to audit the books, and may subject the franchisee or the outlet to periodic or random spot checks. Failure of such tests could involve non-renewal or cancellation of franchise rights.

The Financial Times, a well known and respected UK paper recently reported that if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world!

The Advantages of Franchising are many-fold. The premier one being that the franchisee has the security and backing of an established brand and product, I n many cases one with an already established public following or level of general awareness. This is obviously a huge advantage over starting a business from scratch and having to build a presence in often crowded marketplaces. The franchisee also benefits from the experience of the franchisor in promoting his product or service and the training that they can provide to enable the franchisee to get the business 'up to speed' as soon as possible.

A revealing 2006 study by Franchise Business Review demonstrated that the vast majority of franchisees are satisfied with their decision to invest in a proven system (86% positively rated their franchise experience and 71% said they would "do it again").

 

TERMINOLOGY

Franchisor
The parent company that grants, for a fee and other considerations, the right to use its name and system of business operations.

Franchisee
A person or entity to whom the right to conduct a business is granted by the franchisor or licensor.

Franchising
Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee. Technically, the contract binding the two parties is the franchise.

Master Franchisee
Describes an individual or company owning the exclusive rights to develop a particular territory for the franchising company.

Franchise Agreement
A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed. Some state laws require the contract to be renewable at the franchisee’s option. Usually a franchise agreement may not be sold, transferred, or otherwise assigned without the franchisor’s permission.

Franchise Fee
An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor’s name, logo, and business system. Often, the franchise fee is also the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business. Franchise fees can be amortized over the life of the franchise agreement.

Estimated Initial Investment
A detailed listing of all fees and expenses you can expect to incur in starting your franchised business. This listing represents the total dollar amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real-estate costs; insurance inventory; etc. This estimate should include a provision for working capital through the start-up phase.

Royalty
A continuing payment to the franchisor that is payable on a periodic basis (usually weekly, biweekly, or monthly) throughout the term of the franchise agreement. In theory this royalty payment is for:

  • Compensation for the continuing services given by the franchisor (for training, field services, etc.)
  • Payback financing of the true market value of the franchise. Royalty payments can be either fixed amounts, based on percentage of gross sales, or based on a sliding scale, with graduated breakpoints.

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