Franchise Agreements Definition

Many Fast Food Restaurants are Franchises

Franchises are relationships between an entrepreneuer who wants to use an existing intellectual property or identification, and the owner of that intellectual property. The franchise agreement is the contract between the two parties. Franchise agreements are used in many industries, including automobile dealerships, real estate agencies, tax preparation and fast food.

Franchise History

Franchises are a form of business that emerged in their earliest form around the time of the Civil War. They grew in usage, with most growth occurring in the last fifty years. According to the U.S. Department of Commerce, as well as the Small Business Association, in 1990 there were 7 million workers working in 60 industries for 500,000 franchised businesses, generating more than $700 billion dollars.

Types of Franchises

The two primary forms of franchise agreements are business format franchising, which is more complex but used in most agreements, and product (or trade name) franchising, which is less common. Business format franchising is a case, such as with a fast food franchise, where the franchiser provides site selection, training, marketing plans, business plans, and financing to the franchisee. Due to their larger investment, this agreement often ends with the franchiser taking more profit.

Product franchising, however, simply involves a franchiser leasing a trade name or product to a franchisee, and giving them the right to use it however they wish (restricted by contract, of course) without following a specific format.

Reason To Start A Franchise

According to the U.S. Department of Commerce and the Small Business Association, franchised businesses have lower rates of failure than all other business types. This is likely due to the fact that business format franchising provides a guideline for businesses to follow in quality and style, in addition to a well-known piece of intellectual property that allows them to access their potential customer base faster than an independent startup.

Re-Evaluate

Starting a business is always a major decision, and while franchising is statistically safer than starting up an independent business, it's still something that should be examined in depth. Ask yourself whether or not franchising is your true goal, or if that happiness you might derive from running an independent startup is worth the additional effort and risk.

Visit the franchise's national and regional office, and try to get a feel for how other local franchisees feel about the company and how it treats them. Read their financial statements, investor relations, and other pieces of business news to get an understanding for the path the company is taking. After you've done all this, re-evaluate your decision and decide if you want to start a franchise.

Legal Advice

Like any major legal situation, you should consult a legal specialist before you sign the contract. In addition to franchise attorneys, there are specialized business advisors and accountants who focus on the field of franchising. Have them look over your contract, disclosure documents, and any other documents before signing.

References

• Small Business Administration: Franchising