Opening a franchise is one way for individuals to start up their own business. Though seemingly less complicated than attempting to grow your own brand from the roots up, choosing to open a franchise is not a straightforward process and often comes with its own unique set of legal and financial issues. If you are considering opening up a franchise, here are just some of the items which must be considered.
Your Franchising Arrangement
In business, there are typically two types of business arrangements which may be considered to be a franchise:
- A franchisor will license you to operate your business under the name and format which they have already established (such as a major fast food chain). This type of arrangement is commonly referred to as “business format franchising” or as a “package franchise.”
- You, the franchisee, are allowed to sell products that have been manufactured or are controlled by the franchisor. These products will carry the trade name, trademark, logo or another proprietary symbol that marks the item as being part of a particular brand.
The Benefits of Opening a Franchise
Choosing to open a franchise does come with a host of benefits, including:
- Having access to a pre-existing (and often “proven”) business plan
- Being involved in group marketing (which can reduce marketing expenses)
- Receiving help from the franchisor throughout the course of the franchise agreement
- Opening a business under a recognisable, trusted and established brand
The Costs of Opening a Franchise
These benefits do not come without some form of cost to the franchisee, however. The first cost which franchisees often find themselves up against is a lack of freedom when operating their business. Most franchisees will be subject to a strict contract which works more in the favour of the franchisor than the franchisee. Franchisors are often given rights to:
- The location of your franchised business
- Force franchisees to purchase all of their goods and services through and from them
- Block the sale of your franchise to a potential buyer
As for the actual costs, there are a number of fees and royalties which a franchisee will be liable to pay the franchisor. These fees often include:
- A set percentage of your profits (or royalty)
- Training fees for yourself and any employees hired
- Regular contributions to fund group marketing and advertising
The equipment you will be liable to purchase through your franchisor may also come with an above-market price tag. The franchisor may also choose to tag on additional finance charges.
Protecting Yourself when Investing in a Franchise
If you are considering purchasing a franchise and are unfamiliar with franchise law, strongly consider hiring an attorney who specialises in this area such as one of the experienced Newhouse & Arnold Franchise Lawyers. Many franchise law attorneys offer free initial consultations to interested franchisees. They will gladly go over your franchise contract to ensure that you get the best contract possible that will protect you and your business.