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Loading ...You may find that you prefer to buy a Franchise due to the amount of data that is provided and the operational assistance that you will be given. It is important to note that every franchise offers varying degrees of support and brand value. The costs of franchises vary but the following provides some guidelines when considering if a franchise is right for you:
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You need at least $25,000 of cash - either from home equity line, savings, etc.
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You should have a net worth of at least $100,000, which is a threshold required by most franchise companies.
First, an introduction to some key terms:
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Franchisee - sells products or services (usually supplied by the Franchiser) according to standards of the Franchiser
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Franchiser - company that allows its name, trademark, etc. to be used by Franchisee. Generally, franchisers offer some degree of support for marketing, financial / accounting, operations, training, etc. The level of support offered depends on the franchise.
A franchise is the legal agreement between the owner of trademark, business name or advertising logo and a person wishing to use that trademark, business name, etc. Many entrepreneurs choose to investment in a franchise (e.g., Subway, McDonald’s) versus starting their own business from scratch because franchises have less inherent risk. A company must be around for three years before it is able to sell franchises.
Franchising Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| proven product or service with some brand value | cost for corporate services (e.g., marketing, accounting) |
| some level of support from the Franchisee | |
| growth opportunities – regional franchise or ability to sub-franchise |
By law, franchisors must provide the following to you:
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its Uniform Franchise Offering Circular (UFCO)
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its financial statements
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its key contracts
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one week of training
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information on upfront fees and ongoing fees such as promotional fees
The Uniform Franchise Offering Circular (UFCO) is a descriptive memorandum containing detail information - from operations to financials on a franchisor. UFCOs are regulated by the Federal Trade Commission. Every franchise company that is actively seeking franchisees must have a UFCO available. Now, you are able to purchase UFCOs for a small fee. UFCOs could be valuable as research tools as you try to establish your own business or write your own business plan. For your review, we have a detailed outline of a typical UFCO.
There are a couple types of franchising methods:
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Single Unit-This is likely what most people think of when discussing franchising. Basically, you the franchisee would buy a single store or retail location from the franchisor. You would operate this single location as your business.
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Geographic Area -Instead of only buying the rights to one location, franchisees buy a geography where they are able develop multiple units. For example, if you the franchisee bought McDonald’s franchises for New York, you would be able to build several franchises throughout New York.
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Subfranchising- Geographic Area franchising may give rise to sub-franchising. This is where a you the franchisee may want to subdivide your region and sub-franchise your rights to other potential franchisees. In this case, you would play more the role of franchisor. However, not all companies allow sub-franchising so be sure to do your research.
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Disclosing All Fees - Sample Answers
| Fees | Amount | Due Date | Notes |
|---|---|---|---|
| Royalty | 4% of total gross sales | Payable monthly on the 10th day of the next month | Gross sales includes all revenue from the franchise location. Note that gross sales does not include sales tax or use tax |
| Advertising | 2% of total gross sales | Same as Royalty fee | |
| Cooperative Advertising | Maximum - 2% of total gross sales | Established by franchisees | Franchisees may form an advertising cooperative and establish local advertising fees. Company owned stores have no vote in these cooperatives. |
| Additional Training | $1,000 per person | 4 weeks prior to beginning of training | |
| Additional Assistance | $500 per day | 30 days after billing | Provides opening assistance free |
| Transfer | $1,000 | Prior to consummation | Payable when you sell your franchise. No charge if franchise transferred to a corporation which you control |
