How to Open Your Own Franchise
Author: Ellen Feig
Week after week you drive by the local Domino’s Pizza and see the “Franchise Opportunities” sign in the window. What would it take for you to own and open your own franchise?
WHAT IS A FRANCHISE?
A franchise is usually a branch or offshoot of a well branded business – think McDonald’s, Century 21 and Pizza Hut. All franchises have defined elements that include a refined business system outlining how the business will be run anywhere in the United States, a well identified brand and a fee arrangement between Franchisor and Franchisee. The Franchisor will license, once the fee is paid, the right to use all trademarks, service marks, logos and anything else that is identifiable to the business. A Franchisee may be limited to using the brand name alone or may use the brand name along with a new trade name they have established (i.e. Century 21/Jones Realty).
WHAT IS A BUSINESS SYSTEM?
A business system is the way of doing business that is common to all franchises. A business system may, dependent upon type of business, govern all aspects of how the franchise is run or may even allow the Franchisee a degree of freedom. All franchises have fees associated with the business which the Franchisee will pay to the Franchisor. These fees can include initial costs, royalties, service and license fees and advertising costs.
As a Franchisee is considered an independent contractor they will be responsible for paying employees directly and for payment of any associated taxes. It is important to know that payments must be made even if the franchise proves unsuccessful.
WHAT ARE THE FORMS OF FRANCHISES?
There are five forms of franchises.
1. UNIT FRANCHISING: A Unit Franchise is the basic form where the Franchisee has the right to a single business in a specific location.
2. AREA DEVELOPMENT FRANCHISING: This type of franchise grants the Franchisee a territory where he/she can operate a number of businesses pursuant to a schedule. The Area Development Agreement will outline the territory and schedule for the units agreed upon. The Unit Franchise Agreement will then be signed for each unit opened. If the Franchisee does not open units as scheduled, the Franchisor may terminate. The Franchisee does retain the right to continue to operate those units opened.
3. SUBFRANCHISING: Sub franchising involves three parties. The Sub franchisor obtains territory from the Franchisor and will agree to establish units pursuant to a schedule. A Sub franchisor may then sell units to third parties who will sign unit franchise agreements from the original franchisor. This type of franchising is also known as “master franchising” and is the most common form of franchising in the United States.
4. CONVERSION/AFFILIATION FRANCHISING: The owner of the business decides to affiliate with an established chain. The chain then allows the owner to use pre existing name with franchisor’s brand.
5. NONTRADITIONAL FRANCHISING: A franchisor grants a franchisee a specific location in a non traditional setting – i.e. a kiosk in a mall, a cart at a sporting event.
It is important to remember that franchising is not a dealership, distribution or licensing arrangement.
WHO GOVERNS FRANCHISES?
Franchises are governed by the Federal Trade Commission (“FTC”), franchising trade regulation and by registration and disclosure laws in over fifteen states. The franchisor must provide prospective franchisees with disclosure documents, copy of franchise agreement, any financial statements, names and addresses of other franchisees and any other pertinent agreements. These documents must be received at least two weeks before an agreement is signed and before any money changes hands.
The franchise disclosure document is also known as the Uniform Franchise Offering Circular (“UFOC”) and must provide the franchisee with all information that is needed to make an informed decision. If a franchisor fails to disclose information they may be subject to fines and investigation. States have laws imposing regulations on franchisor conduct including standards of termination agreements, renewal of franchise agreements and franchisee duties. In general franchises are regulated by contract law, antitrust law, federal and state standards.
