Franchising is a long-term relationship between a franchisor and a franchisee. In this relationship, the franchisor provides the franchisee with licensed privileges including trademarks, production, brand names and marketing methods for an agreed-upon fee. Franchising requirements depend on location, business types and franchisers, and are the necessary conditions that must be met between a franchisor and a franchisee in order for a franchise to materialize.
Franchise Disclosure Document
One of the first steps on the road to franchising is the franchise disclosure document. The franchisor must present this document to the franchisee at least 14 days before they are expected to sign any paperwork or make any payments. The FDD delivers extensive information to the franchisee about the franchise company and the franchisor. The document also includes full details of past and present franchisees.
The franchise agreement outlines what is expected of you as a franchise owner, what the franchisor will provide and the steps you and the franchisor will pursue if your partnership is not successful. Key aspects of a franchise are often non-negotiable, and the franchise agreement may seem one-sided in favor of the franchisor. The franchisor uses the franchise agreement to protect the brand and operations and to ensure standardization across all franchises. Further, the franchisor must adhere to certain legal requirements. Thus, the franchise agreement allows the franchisor to manage legal and operational activities in a way that is consistent among all franchises.
Operations and Restrictions
As a franchisee, certain business decisions may be out of your hands. You may not be able to control the design and outlay of your business, and you may not be able to set up shop at your choice location. The franchisor may also determine where and what products and services you purchase and may determine how you operate your business, including when you open and close for business, employee uniforms and the price you set for your products. You must adhere to operational requirements to avoid breaching your franchise contract and to enhance your chances of contract renewal – franchise renewal is not guaranteed.
Acquiring a franchise requires substantial financial investments. You will pay an initial fee, and some franchisors require that you come up with a certain percentage of un-borrowed cash to purchase the franchise. Apart from the cost of the franchise itself, plan for legal fees and, depending on the kind of business being franchised, you must also consider future outlay. If a restaurant is being franchised, for example, there are utility bills, stock and staff wages. Further, a percentage of your sales will go toward monthly fees, which may include franchise ownership fees, rent and advertising.
Owning a franchise requires you to invest a considerable amount of time -- not only in the daily operations of the business but also in terms of the length of your franchise term, that is, the length of time that you are a franchisee. According to Jeff Elgin of Entrepreneur Magazine, typical contract terms are five, 10 or 20 years. Once you sign your franchise contract, it may be difficult to get out of that contract unless you sell the remaining time left in your contract. Selling your franchise is not always feasible, and how and to whom you sell may be governed by the franchisor.