Franchising Definition:
Franchising is a system of distribution wherein a brand-owner (the "Franchisor") licenses its product/service/system to an operator (the "Franchisee") in exchange for a fee.

Some Characteristics of a "Typical" Franchise System
1. The Uniform Franchise Offering Circular: Describes the history of the Franchisor and discloses virtually every element of the franchise relationship to the Franchisee. Contains the Franchisor's audited financial statements. Contains the current Franchise Agreement and lists the Franchisees.
2. Term and Protected Territory: Describes the length of the contract and territory in which the Franchisor cannot establish company or franchised units.
3. Opening Support: A Franchisor will have a template to open the business. This should include physical plant specifications (where applicable), accounting systems, supplier recommendations, product lists and much more.
4. Initial Franchise Fee: The fee paid to the Franchisor (typically upon signing the Franchise Agreement) for the right to enter into the Agreement. Most Franchisors use this to defray part of the franchise opening expense.
5. Royalty Fees: Fees (usually monthly, but shorter time periods are becoming more common) paid to the Franchisor for the right to continue to use the brand name and operating system. Note that Franchisees do not "buy" the Franchisor's name but rather "borrow" it for the term of the Agreement.
6. Group Purchasing: Good Franchisors will leverage their buying power and Franchisees should benefit. Theoretically, this should help quality control as well. Consistent quality between franchises is beneficial to everybody. Group purchasing can (and should) extend to services as well (insurance, payroll, etc.).
7. Group Marketing and Advertising Fees: Franchisors frequently form one or more advertising funds with which to purchase media and defray creative costs. These funds can frequently be supplemented with funds from key manufacturers or suppliers.
8. Operating Systems: Usually a series of ever-changing manuals delineating how a Franchisee will conduct business.
9. Training: Franchisors nearly always have an initial and on-going training program for franchisees and management. Sometimes initial training is provided as part of the initial franchise fee and on-going training involves further fees.
10. Conflict Resolution: Describes how the franchise system will be monitored, what will happen in the event there is a conflict and what happens if the conflict cannot be resolved.

This is by no means a complete list. In addition to the legal and accounting matters, potential Franchisors and Franchisees should be aware of the BUSINESS issues as well. Below find our "pros and cons" to becoming a Franchisor or a Franchisee:

Top Five Pros and Cons (Franchisor's perspective)

Pros
1. Enables brand to expand with less up-front capital.
2. Puts the day-to-day operations in the hands of individual highly-motivated parties (franchisees).
3. Allows for geographical diversification.
4. Requires fewer personnel.
5. Allows company to focus on systems.

Cons
1. No direct control over operating units.
2. Needs maintenance of legal and accounting requirements.
3. Frequently less profitable than operating successful units.
4. When mature, less nimble in times of change.
5. Some entrepreneurs have difficulty with the culture shift.

Top Five Pros and Cons (Franchisee's perspective)

Pros
1. Recognizable and valuable brand and protected territory.
2. Proven operating systems.
3. Group purchasing power.
4. Group marketing power.
5. Built-in peer group.

Cons
1. Fees.
2. Must follow system; less autonomy.
3. High level of exposure in the event of Franchisor failure.
4. Long contract length.
5. Not a guarantee for success.

Kandally Can Help
Todd King has spent virtually his entire career in franchising. He is comfortable helping the potential Franchisee in looking at the business elements of a franchise agreement. Todd is also adept at helping new Franchisors establish a successful program. Existing Franchisors should contact Todd for an objective look at their franchising agreements and relationships.