Franchising 101 Terms & Facts

franchising

For those of you looking to get into the world of franchising, it can be overwhelming at the beginning. However, rest assured, once you know all the lingo and facts it is pretty straightforward to get going. Franchising can be very rewarding and make you a successful business owner.

Franchises Definition and how you can get involved

A franchise is a brand or company where an investor has bought the rights to its use. The brand gives the license, support, and marketing. The investor runs the day-to-day activities and manages the place.

Franchising is a large part of the economy, offering over 18 million jobs and generating about $2.1 trillion to the economy in The United States. There are currently about 825,000 franchise opportunities and businesses. They cover about 300 industries which means there is virtually any industry that everyone could be interested in.

A franchise can be a restaurant, a fast-food joint, a hair salon, a gym, and many many others.

Before investing in a franchise, it is always a great idea to talk to current and former franchisees. Keep in mind they will not able to give out sales numbers or earnings information as this is confidential.

Most companies have an option to get started by inquiring on their website. They will provide contact information and other basics about what you can expect. You can then set up a meeting to determine the exact requirements.

Some terms to know

Once you know the terms that are commonly used in the business, you will sound like a pro when discussing your franchise opportunities.

Franchisee

This a person who buys or invests in a franchise to become an owner of the business.

Franchisor

A business or company that wants to expand their outreach by franchising. They offer investors an opportunity to run a whole location or just one singular branch.

Conversion Franchise

A business that used to be independent, but joined a franchise system in order to capitalize on the other brand and be able to use their systems.

Master Franchisee or Sub-Franchisor

The master franchisee is in charge of recruiting new franchises and also giving them the support and the training that they need to be successful. They usually are in charge of a very large location or a whole territory.

Franchise Fee

When you purchase and set-up a franchise, you have to pay several fees. The franchise fee is given to the franchisor and it allows them to officially become a franchisee.

Royalty Fee

This is usually a percentage of monthly franchise sales that is given to the franchisor. Some franchisors offer a flat fee as well.

Protected Territories

This is when the franchisor makes a commitment to limit the number of competing locations near the one you are starting. This is important as you do not want another franchise close to you. If you are the only one in a particular town or territory, you are more likely to make money and create loyal customers.

Franchise Broker/Consultant

A franchise broker will help you pick a franchise that best suits your interest, location, and budget. Some will just help you determine a good choice, while others will actually help you make the sale and complete all the paperwork.

Discovery Day

This is when a potential franchisee will visit the company headquarters and meet the franchise team. This is the day you will be able to actually meet the people you could potentially work with. It is a great time to see the business operations and decide if they meet your criteria. After this day, it will be easier to make a decision about whether you want to move forward or not.

International Franchise Association (IFA)

This is an association dedicated to helping you break into the franchise industry. They are based in Washington DC and will help anyone who is researching, buying, or starting a franchise.

Franchise Disclosure Document (FDD)

This is required at both the federal and state level. This is all the paperwork where the Franchisor will disclose the information about the franchise offer, the company, and the network. Of course, always make sure to read it carefully and know all the details before accepting or signing.

Your FDD will probably be divided into 23 sections or Items. Make sure to read all of the franchisor’s financial statements and Item 3 and Item 19.

Why? Item 3 is the company’s history of litigation and arbitration while Item 19 is the franchisor’s financial performance. Most entrepreneurs recommend that any franchisee ask how the culture of the company is and whether franchisees are customers or employees in their culture. Both are okay, it just depends on what you prefer.

The FDD will also list all of the company’s current franchisees which is a great resource. You can use their contact information to ask about their experience. The FDD should also list the information from franchisees who left during the past year. It is always a good plan to ask them how they fared with the company and why they left.

Franchise facts and advice

Most franchises contracts will last ten years but could be more or less.

Veterans usually get discounts on franchise fees and other incentives, so keep this in mind if you are a veteran.

You will have more access to credit and financing since franchise businesses are generally stable and successful. There are two types of major financing options: in-house and third-party. In-house financing will be when the company has its own loan and financing program. Third-party financing will be from a bank or outside lender.

Always have a business plan and a road map. The franchise will already have systems in place, but keep in mind what you are comfortable with and what you envision for your business.

Use the franchisor’s training program. This will give you crucial advice and support. Most franchises already have training programs in place that have proven very successful in the past and should be utilized.

Zacs Food Truck

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