What You Need To Know About Franchising
Your Business
The Success of
Franchising
Never before in the history of marketing has
a method been more successful for business owners to expand than in
franchising. According to the U.S. Department of Commerce,
franchising has a failure rate of only 3.7 percent.
Franchising is expected to reach $2 trillion by 2010,
according to the Federal Trade Commission.
A survey was
conducted with the help of the International Franchise Association
to its franchisor membership and one of the questions that was asked
to existing franchisees was…”Would you purchase your franchise if
you had it to do over again?” The answer was positive from 93
percent of the owners. This confirms the success of franchising in
the lives of franchise owners.
What is
franchising?
To define franchising in one word would be
“marketing”.
Franchising is a very sophisticated method of marketing a
product or service that just happened to be federally regulated in
the United States and many foreign countries. Although franchising
as a method of marketing can be dated back thousands of years ago,
modern day franchising had its origin around 1850 when Singer
Manufacturing Company began offering distribution agreements to
individuals to represent their product. Franchising has come a long
way since then.
Around the 1900’s, the oil and gas industries along
with the automotive and bottling industries, used “trademark”
franchising exclusively. By the mid 1930’s numerous businesses
used “business format” franchising as their method of expansion.
But by the 1950’s with businesses like McDonalds, franchising
came into it’s own. It was not until October 21, 1979
that the federal government enacted FTC Rule 436 which requires
franchisors to comply with various regulations and guidelines
in the offering of a franchise. This rule is still required
to this day. For a copy of the Rule go to http://www.nfsdev.com/FTCrRule436.pdf
What is a Franchise?
A franchise in
a word is an “agreement”. It is the contractual relationship that
binds the parties together. The true value of any franchise will
depend on the agreement itself. It is very important that the
agreement be marketable too!
Some of the items that require
careful consideration are:
• The initial
franchise fee
• The trademarks and use
of
• The continuing fees
(royalties)
• The terms and conditions of the
agreement
• The
territory
• The training
provided
• The support of the
franchisor
Who is Considered a Franchisor?
The
federal government says that any business that is being offered to
the general public that requires the potential buyer to sign a
written contract and that contract contains their three (3)
elements:
• The “Marks”, tradename, service
marks, or trademark
• Significant controls or
assistance
• Remuneration of $500 or more
within a time period of 6 months
What the FTC Rule
Requires
FTC Rule 436 requires that the franchisor
comply with several basic things. All have to do with the actual
offering of the franchise to a potential buyers and the manner in
which it is offered. They are:
Provide the potential buyer
with full disclosure in a required format which identifies various
items of disclosure (when using the Uniform Franchise Offering
Circular, 23 items with numerous sub items are
required).
Provide the full disclosure document 10 business
days before you the buyer is required to pay any money or sign any
agreement with the franchisor.
The franchisor is prohibited
from giving “earning claims” or “projections” of earnings unless
certain requirements are met by the
franchisor.
Regulation States
In addition
to the FTC Rule, there are 15 States that require separate
registration to allow a franchisor to market the franchise within
their jurisdiction. Those states are:
- Hawaii
- California
- Oregon
- Washington
- North Dakota
- South Dakota
- Minnesota
- Wisconsin
- Illinois
- Indiana
- Michigan
- Virginia
- New York
- Maryland
- Rhode Island
What do you need in developing a
franchise?
The development of a franchising is a
continuious process so long as you are offering franchises. Some of
the items that you are going to need are as follows:
- Corporate Structure
- Federal Trade Mark Registration
- Audited Financial Statements
- Uniform Franchise Offering Circular
- Promotional & Marketing Materials (could be a web
site)
- Manuals (Development & Operations)
- Franchisee Training Program
- Franchisee Support
- Registration in Regulatory States
- Profile of who your franchisees will be
- Marketing Procedures
How long does it take to develop a
franchise?
National Franchise Services is able to get a
franchisor client up and marketing within 45 to 60 days once
development has begun. However, full development is an on-going
process and requires at least 12 months to create the materials and
tools that a franchisor needs.
What are the costs
associated with franchising?
Some franchisors can begin
the process with a budget of under $40,000. However, the costs are
continuous just like development. If a franchisor elects to begin
marketing while still in development, money will begin flowing into
the franchisors bank account from the sale of franchises. This eases
the financial burden of the franchisor. Recently a franchisor began
franchising who had a limited budget but was committed to the
venture and within 8 weeks of development had 12 franchises sold
which brought into the company $300,000 in fees.
Does my business need to be in operation for a
period of time before I franchise?
There are no
requirements or restrictions concerning the business or length of
time in existence. However, a track record that allows you to
understand your business is important if you are going to teach
others how to operate and run the
business. | 
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- 2005 National Franchise Services. | CONTACT US