The Benefits And Responsibilities Of Franchise Ownership
To help you evaluate whether owning a franchise is right for you, the Federal
Trade Commission has prepared this booklet. It will help you understand your
obligations as a franchise owner, how to shop for franchise opportunities, and
how to ask the right questions before you invest.
A franchise typically enables you, the investor or "franchisee," to operate a
business. By paying a franchise fee, which may cost several thousand dollars,
you are given a format or system developed by the company ("franchisor"), the
right to use the franchisor's name for a limited time, and assistance. For
example, the franchisor may help you find a location for your outlet; provide
initial training and an operating manual; and advise you on management,
marketing, or personnel. Some franchisors offer ongoing support such as monthly
newsletters, a toll free 800 telephone number for technical assistance, and
periodic workshops or seminars.
While buying a franchise may reduce your investment risk by enabling you to
associate with an established company, it can be costly. You also may be
required to relinquish significant control over your business, while taking on
contractual obligations with the franchisor.
Below is an outline of several components of a typical franchise system.
Consider each carefully.
The Cost
In exchange for obtaining the right to use the franchisor's name and its
assistance, you may pay some or all of the following fees.
Your Initial Franchise
Fee
which may
be non-refundable, may cost several thousand to several hundred thousand
dollars. You may also incur significant costs to rent, build, and equip an
outlet and to purchase initial inventory. Other costs include operating licenses
and insurance. You also may be required to pay a "grand opening" fee to the
franchisor to promote your new outlet.
Continuing Royalty Payments
You may have to pay the franchisor royalties based
on a percentage of your weekly or monthly gross income. You often must pay
royalties even if your outlet has not earned significant income during that
time. In addition, royalties usually are paid for the right to use the
franchisor's name. So even if the franchisor fails to provide promised support
services, you still may have to pay royalties for the duration of your franchise
agreement.
Advertising Fees
You may have to pay into an advertising fund. Some portion of
the advertising fees may go for national advertising or to attract new franchise
owners, but not to target your particular outlet.
Controls
To ensure uniformity, franchisors typically control how franchisees conduct
business. These controls may significantly restrict your ability to exercise
your own business judgment. The following are typical examples of such controls.
Site Approval
Many franchisors pre-approve sites for outlets. This may increase
the likelihood that your outlet will attract customers. The franchisor, however,
may not approve the site you want.
Design Or Appearance Standards
Franchisors may impose design or appearance
standards to ensure customers receive the same quality of goods and services in
each outlet. Some franchisors require periodic renovations or seasonal design
changes. Complying with these standards may increase your costs.
Restrictions On Goods And Services Offered For Sale
Franchisors may restrict
the goods and services offered for sale. For example, as a restaurant franchise
owner, you may not be able to add to your menu popular items or delete items
that are unpopular. Similarly, as an automobile transmission repair franchise
owner, you might not be able to perform other types of automotive work, such as
brake or electrical system repairs.
Restrictions On Method Of Operation
Franchisors may require you to operate in a
particular manner. The franchisor might require you to operate during certain
hours, use only pre-approved signs, employee uniforms, and advertisements, or
abide by certain accounting or bookkeeping procedures. These restrictions may
impede you from operating your outlet as you deem best. The franchisor also may
require you to purchase supplies only from an approved supplier, even if you can
buy similar goods elsewhere at a lower cost.
Restrictions Of Sales Area
Franchisors may limit your business to a specific
territory. While these territorial restrictions may ensure that other
franchisees will not compete with you for the same customers, they could impede
your ability to open additional outlets or move to a more profitable location.
Terminations and Renewal
You can lose the right to your franchise if you breach the franchise contract.
In addition, the franchise contract is for a limited time; there is no guarantee
that you will be able to renew it.
Franchise Terminations
A franchisor can end your franchise agreement if, for
example, you fail to pay royalties or abide by performance standards and sales
restrictions. If your franchise is terminated, you may lose your investment.
Renewals
Franchise agreements typically run for 15 to 20 years. After that
time, the franchisor may decline to renew your contract. Also be aware that
renewals need not provide the original terms and conditions. The franchisor may
raise the royalty payments, or impose new design standards and sales
restrictions. Your previous territory may be reduced, possibly resulting in more
competition from company-owned outlets or other franchisees.
Next Chapter:
Before Selecting
A Franchise System
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