Franchising is becoming an increasingly popular form of entrepreneurship. As any other business model, it has its advantages and disadvantages. While some entrepreneurs love franchising and are hugely successful at it, others dislike being governed by the rules of a franchising brand. Reviewing the answers to some frequently asked questions about franchising can help you figure out whether buying a franchise would be a good option for you.
1. Question: How does franchising work?
The typical franchise model is based on providing certain branded goods or services. The franchisor is the owner of the original business who holds the rights to the trademark and the business system. The franchisee obtains the right to operate under the franchise’s name, typically paying an initial fee, as well as royalties, to the franchisor. When you buy a franchise, you will be presented with a franchise agreement that will detail your rights and obligations. Expect to be required to adhere to the franchisor’s business system. Franchises do differ in the amount and details of their rules for franchisees. If your franchise is based on selling goods or food, you may have to use ingredients, parts or ready-made product provided by the franchisor. If your business is service-oriented, you will likely have to follow your franchisor’s manuals and procedures.
2. Question: What are the advantages of franchising?
The chief benefit of buying a franchise is the use of an established brand to market your business. When you start a new company from scratch, you generally have to put in a tremendous amount of effort into marketing, advertising and networking in order to achieve brand recognition and attract customers. Franchises, on the other hand, are already well known to the public and come with a built-in customer base, allowing you to save the money and effort you would spend just to get your name out there. You will also have the advantage of following a business model that has already proven successful, eliminating the trial-by-error method of developing your own system. Many franchisors also provide detailed guidance for establishing a management structure, solving problems and making decisions.
3. Question: What types of business are usually franchised?
Not all kinds of products and services are suitable for the franchising model. If you are interested in buying a franchise, check to see if your talents and interests are compatible with a business type that is likely to be franchised. Most people associate franchising chiefly with restaurant chains and fast food, but in recent years many other service providers have expanded through franchising. Successful franchisors include real estate agencies, hotels, printing services, cleaners, landscapers, construction firms, advertising and more.
4. Question: How do I know if a particular franchise is a good investment?
If you are thinking of purchasing a franchise, you want to be reasonably sure that you are buying into a truly successful business that will allow you to gain real profit. Thus, you want to avoid being saddled with an agreement that ties you to a waning brand or that transfers the bulk of your profits to the franchisor. Before investing in a franchise, it is worthwhile to do some research and learn more about its financial wellbeing and prospects for growth. You should also carefully review your franchise agreement before signing in order to ensure that your rights are protected and that all provisions are acceptable to you. For most prospective franchisees, the best option is to have an experienced attorney or financial advisor review the franchising agreement and any other documents. As with any other contract, once you sign your agreement it can be extremely difficult to get out of it or to renegotiate any terms.
Buying a franchise can be a great way to start a new business for an entrepreneur who is willing to follow the franchisor’s rules and to represent its brand. Doing due diligence before purchasing will help you avoid potential pitfalls and increase your chances of success.
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