Franchising

Frequently asked questions about Franchising.

1. What is Franchising?

A franchise is a business arrangement in which an established company sells an entrepreneur or investor, the franchisee, a license to use the name, and sell products and/or services of the franchising company.

2. How Does a Franchise Work?

The franchising company charges the franchisee an initial fee to purchase the rights to franchise their business. The franchising company also charges an ongoing licensing fee based on a percentage of the gross revenue earned by the franchisee in their business. In return, the franchisee is able to do business acting as an extension of the franchising company, while retaining the majority of the revenue earned from the franchise business.

3. Why do Companies Franchise their Business?

The franchising company is able to expand their business without spending any out-of-pocket capital or borrowing added funds. Additionally, the franchising company does not have to manage or maintain the franchised business, as this responsibility falls to the franchisee. Basically, the franchisor earns revenue licensing out their Brand name.

4. What are the Benefits to the Franchisee?

The entrepreneur or investor purchasing the franchise is able to establish their own business using a proven business model, selling products or services already familiar to the public. Additionally, the franchising company provides the franchisee logistical support and advice in selecting a site, securing a lease, building out the space and purchasing supplies to operate the business. The franchisee also benefits from the ongoing marketing efforts of the franchising company.

5. How Much Does it Cost to Purchase a Franchise?

The cost varies widely, depending largely on the franchising company and the type of industry. Hotels and many restaurants require a multi-million dollar investment for the initial purchase. The initial purchase fee for service providers (auto care, appliance service and home repair), and larger consumer retail stores generally ranges from $200,000 - $500,000. Smaller consumer retail stores and home-based franchise businesses can be purchased for $5,000 - $75,000. The cost to purchase a franchise with Relax The Back ranges between $247,500 to $401,500. In many cases, a realistic cost is about $340,000 for a turnkey start-up.

6. How Much are the Ongoing Licensing Fees?

Again, the ongoing licensing fees depend upon the franchising company and the industry. Generally, ongoing fees are based on a percentage of gross monthly sales, ranging from 4% - 8%. Some franchisors charge a flat annual fee and a monthly percentage, while others charge a flat monthly fee with an annual percentage. The fees are usually broken down by royalties, trademark fees, advertising, etc.

7. How Do I Determine the Right Franchise Option for Me?

Similar to any investment opportunity, purchasing a franchise involves a certain amount of risk. The franchising company's stability, the type of product or service the franchise offers, the degree of competition in the marketplace, and the level of support and advertising the franchisor provides are among the key considerations in selecting a franchise. Selecting a franchise with strong Brand recognition, and a proven financial track record, is imperative. When you purchase a franchise, you're trading on the company as an established commodity with strong financial security. The support offered by the franchisor is another key consideration, particularly if you're not experienced in running a business, or running the type of business you're purchasing.

Demand vs. Competition
If you're looking to set up shop in a particular area, you need to evaluate the marketplace. What types of products or services are in demand in the area? What's the level of competition for products or services consumed in the area? For example, just because fast food is popular and successful in your area, that doesn't mean there's room for another operator in the marketplace.

8. How do I Find an Attorney that Specializes in Handling the Purchase of a Franchise?

Purchasing a franchise and establishing your franchise as a new business involves a unique set of circumstances. Using an attorney that specializes in handling franchise purchase arrangements is highly recommended. The best place to start is your state or even county Bar Association. Most local Bar Associations allow member attorneys to designate their specialty. Additionally, The American Bar Association publishes a membership directory for the Forum of Franchising Committee. The directory includes contact information for attorneys belonging to the committee. You can contact the Forum Committee through their website: http://www.abanet.org/forums/franchising, or for further information, contact the American Bar Association: http://www.abanet.org