Franchising

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Checklist of Basic Franchise Agreement Terms

Franchise agreements are tailored to specific situations. Thus, it is impossible to identify every term and issue that should be considered in every situation. However, the Checklist of Basic Franchise Agreement Terms will provide you with a comprehensive listing of the basic terms that may be included in a franchise agreement. It also identifies many of the issues surrounding those terms that should be addressed. If you are considering the purchase of a franchise, use the checklist to help you understand the terms typically included in a franchise agreement and to review the agreement provided by the franchisor.

General Information About Your Company

Legal Business Name and Doing Business As: Your legal business name is the name under which you are incorporated and pay taxes. If you commonly use another name for normal operations, such as a franchise or licensee name, then include that in the space below the "Legal Business Name" field.

Financing Through Franchising

"Franchising" is the transfer of the right to sell a trademarked product or service through a system prescribed by a "franchisor," who owns the trademark. Franchising has been one of the fastest growing areas of new business development during the last 15 years and there are currently over half a million franchise businesses in the U.S. While traditional franchise businesses such as gasoline stations, auto dealers, and soft drink bottlers continue to grow, the most rapidly expanding industries for franchises are service businesses involving recreation and leisure activity and business services.

For the Franchisor

Some entrepreneurs may begin their business with the intent of franchising their operations; other businesses may elect to franchise an existing business because it has been so successful. For franchisors, franchising is a means of equity financing in which the franchisor "sells off" expansion rights in the business. In return, the franchisor typically receives an initial franchise fee, service fees, equipment sale or lease fees, and royalties.

For the Franchisee

A primary advantage of franchising is that you can reduce the risks associated with a new business by buying into an existing business that has established goodwill and a marketable reputation. While purchasing a franchise may often be a more expensive way to start a business, franchises can also provide a "blueprint" for business operations that's especially valuable if you don't have much experience in the type of business you want to start.

Acquisitions and Franchise Opportunities

If you're considering acquiring an existing business, how do you know how much to pay? Will the business provide you with the income you need three years down the road? A business plan is the perfect tool to use when you assess whether you should buy a business or let the opportunity go by.

Franchising

A good way to reduce your risk of failure is to purchase a franchise because franchises typically have a higher success rate than other types of small businesses. Conventional wisdom holds that franchises have a failure rate of about five percent, compared to the 50 percent failure rate of independent entrepreneurs. Note, however, that the five percent rate doesn't take into account the fact that franchise failure rates vary widely by the type of business. It's best to do some research into the particular type of business before drawing much comfort from this conventional wisdom.

Deciding Whether to Buy the Franchise

Once you have found a franchise and have completed your investigation, all that's left is the final purchase decision. Here are a few suggestions for things you should think about before you make that final decision:

Investigating the Franchise

Buying a franchise, like making any other major purchase, should involve a thorough investigation. The time spent investigating the franchise, the industry, and the market will make you confident that your decision to buy (or not to buy) was the right decision.

Franchise vs. Existing Business

A more difficult decision than deciding whether to buy a franchise or start a business from scratch is whether to buy a franchise or buy an existing business. The difficulty lies in the fact that both the franchise and the existing business have many similarities, such as:

Franchise vs. New Business

In deciding between purchasing a franchise and starting a new business, perhaps the best place to begin is to ask yourself why you want to own a business. The answer you give may provide some insight into which path you should choose.

Finding a Franchise

If you're considering buying a franchise, there are several places you can look. If you have a pretty good idea which franchise you're interested in, the most obvious place to start is with the franchisor. The franchisor can give you all the information you'll need about purchasing a franchise.

Why Buy a Franchise?

First of all, let's define what we mean by the term: franchising refers to an arrangement in which a party, the franchisee, buys the right to sell a product or service from a seller, the franchisor. The right to sell a product or service is the franchise.

Buying a Business or Franchise

If you think that starting a business from scratch is too difficult but still want to have your own small business, you have choices. You should consider either:

The Right Small Business for You

Finding the right small business to meet your individual strengths, needs, and goals has two components.