Franchising Basics - What You Need to Know

By Cecelia Taylor

Do you want to be your own boss, but are you not willing to take on the risk of starting your own business from scratch? Then franchising can be a great alternative if you are an entrepreneur with limited business experience or resources, and you want to have some guidance in the start-up phase of the business.

What Exactly is Franchising?

 A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards.

 Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financial assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.

 There are two primary forms of franchising: 

• Product or trade name franchising - Franchisee obtains the right to distribute a product manufactured by the franchiser 
• Business format franchising - Franchiser owns the right to the name or trademark and sells that right to a franchise 

Franchisers and franchisees have an ongoing relationship, and the franchiser often provides a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing. 

Before You Buy…Look Before You Leap

Before you decide to buy a franchise, you need to do your research. You could lose a significant amount of money if you don't investigate a business carefully before you buy. By law, franchise sellers must disclose certain information about their business to potential buyers, so make sure you get all the information you need first before entering into this form of business. 

Is Franchising theWay to Go?

Useful tips to determine if the franchise business model is right for you: 

• Is Franchising for Me?- This workbook from the U.S. Small Business Administrationemphasizes key areas to consider when franchising, and includes several checklists to evaluate your readiness. 

Additional Resources 

• Introduction to Franchising– FranNet and SBA’s online seminar on franchising basics 
• Franchising Strategy- Before investing in a franchise, you will need a strategy. Do your homework first  so that you can gain a solid understanding of what to expect, and the risks involved. 

Related Articles 

• Consumer Guide to Buying a Franchise
• Franchise Associations & Forums