Franchising is one of the world's most popular business models. Over 700,000 franchise-related businesses exist in the United States alone. With a franchise, you can build your business on the reputation, or brand, already established by the franchisor. Opening a business under a franchise arrangement, however, comes with many restrictions.
Owning a Franchise is a Complex Trade-Off
Under a franchise arrangement, you obtain trademark and other rights from the franchisor. In exchange, you pay fees to the franchisor and agree to accept restrictions on your business operations. An example of a franchise arrangement would be a KFC outlet. In this arrangement, you pay fees to the KFC franchise and accept operational restrictions in exchange for the right to use the KFC trademarks and recipes for your profit. You must sign a franchise agreement that defines your rights and obligations.
You Must Protect the Franchisor's Reputation
The essence of a franchise is the business reputation of the franchisor. That is why the franchisor will insist that you abide by certain rules. Your sales outlet, for example, may be required to look almost exactly like other sales outlets of the same franchise. Most likely, you will not be allowed to sell any products other than the franchised products. Your employees will be required to follow certain work rules. You also will have to obtain approval concerning the content of any advertisements. Geographic restrictions will apply as well. Your authority to do business under the franchise may be limited to a single district or even a single outlet.
Most Franchisors Offer Training
You and your employees will need training on how to comply with the numerous restrictions on your business operation. Most franchisors offer this training free of charge as part of the overall franchise agreement. The McDonald's franchise, for example, operates Hamburger University to train franchisees and their employees. Some franchisors send staff to other sales outlets for training, while others require franchisees to send their employees to centralized locations. Who pays for transportation is an issue that you should negotiate before signing the franchisee agreement.
Two Types of Franchise Fees Apply
Nearly every franchisor will require you to pay royalties on a periodic basis, often every month. Royalties are usually calculated as a percentage of your sales but may be calculated as a percentage of your profits. Almost all franchisors also require you to pay a lump-sum, upfront fee to obtain a franchise. You may be required to purchase certain supplies from the franchisor, although anti-monopoly law limits the ability of the franchisor to force you to buy only its products.
A Lawyer Can Help
The law surrounding operating a franchise-model business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.