Is Franchising for Me? Introduction Workshop

Training Module – 1

Workshop Objectives

By the end of this workshop, you should be able to:

* Define franchising.
* Determine whether franchising is the best business option
for you
– evaluate your skills and experience
– identify your reasons for purchasing a franchise
– personal characteristics
– personal conditions
– experience.
* List
– advantages of franchising for both the franchisor and
– disadvantages of franchising for both the franchisor
and franchisee
* Identify franchisor’s responsibilities.
* Determine what is contained in a franchise package.
* Understand the franchise contract
– legal implications
– your rights and obligations as a franchisee
– financial statements, contracts and receipts
– trademarks and copyrights
– restrictions on goods and services to be offered
by franchisees
– renewal, termination and sale of the franchise


Deciding whether or not to go into business is a very important
step in the business start-up process for new and potential small
business owners. Each year, thousands of entrepreneurs and
potential entrepreneurs are faced with this difficult decision.
Because of the risk and the amount of work involved in starting a
new business, many new and potential small business owners choose
franchising as an alternative to starting a new, independent

Although the success rate for franchise-owned businesses is
significantly better than the success rate for many independent
businesses, there is no formula to guarantee success. One of the
biggest mistakes you can make is to be in a hurry to get into
business. That’s why it’s important to understand your reasons
for going into business, and to determine if owning a business is
right for you.

If you are concerned about the risk involved in a new,
independent business venture, then franchising may be the best
business option for you. Remember, however, that hard work,
dedication and sacrifice are key elements in the success of any
business venture, including 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 seeking the right 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 franchisor or
sells goods or services that meet the franchisor’s quality
standards. Franchising is based on mutual trust between the
franchisor and franchisee. The franchisor provides the business
expertise (i.e., marketing plans, management guidance, financing
assistance, site location, training, etc.) that otherwise would
not be available to the franchisee. The franchisee brings to the
franchise operation the entrepreneurial spirit and drive
necessary to make the franchise a success.

While forms of franchising have been in use since the Civil War,
enormous growth has occurred in franchising only recently. By the
end of 1985, 500,000 establishments in 50 industries achieved
gross sales of over half a trillion dollars and employed 5.6
million full and part-time employees. Franchising created 18,500
new businesses in 1991 and approximately 108,000 new jobs to the
economy. Business format franchises experienced sales growth of
8.9 percent from $213.2 billion in 1990 to 232.2 billion in 1991.
Industries that rely on franchised businesses to distribute their
products and services touch every aspect of life from automobile
sales and real estate to fast foods and tax preparation. Thus, we
can see that franchising can be is a viable, lucrative business

There are primarily two forms of franchising:

* product/trade name franchising and
* business format franchising.

In the simplest form, a franchisor owns the right to the name or
trademark and sells that right to a franchisee. This is known as
“product/trade name franchising.” In the more complex form,
“business format franchising,” a broader and ongoing relationship
exists between the two parties. Business format franchises often
provide a full range of services, including site selection,
training, product supply, marketing plans and even assistance in
obtaining financing.


During this activity you will:

* List at least three reasons for going into business.

* Identify the type of business you are interested or may be
interested in operating.


As with any business, the first step in determining whether or
not to enter into the venture is to assess your reasons for going
into business. If you feel you need a change, or you’re tired of
having other people tell you what to do, then you should reassess
your decision before investing your time, money and energy
because operating a business requires more than a need for a
change, or the desire to do as you please. Purchasing a franchise
like any other business requires a total commitment of your time,
energy and financial resources. If you are not prepared to invest
these qualities and resources into your franchise, then you
should stop at this point.


Identify Your Reasons

As a first and often overlooked step, ask yourself why you want
to purchase a franchise. This question, although basic, is an
excellent way of evaluating your reasons for going into business.
List every reason you identify, no matter how farfetched it may
seem. Divide your list into two separate components. Separate the
viable reasons from the trivial reasons and categorize them
accordingly. It isn’t unusual for reasons to range from the
desire to be your own boss to the desire to be a billionaire.
Whatever your reasons, remember that your future is at stake so
try to be objective. Your checklist should include reasons such
as these (check each that applies to you):

* Freedom from the 9-5 daily work routine ____
* Being your own boss ____
* Doing what you want when you want to do it ____
* Improving your standard of living ____
* Bored with your present job ____
* Have a product or service for which there is a
demand ____

Some reasons are better than others, none are wrong; however, be
aware of tradeoffs. For example, you can escape the 9-5 daily
routine, but you may replace it with a 6 a.m. to 10 p.m. routine.

After assessing your reasons for going into business, next
conduct a self analysis to determine if you possess the personal
characteristics needed to be a successful franchise owner.
Consider questions such as:

Personal Characteristics

1. Are you a leader? ___ ___
2. Do you like to make your own decisions? ___ ___
3. Do others turn to you for help in
making decisions? ___ ___
4. Are you willing to accept managerial
assistance from the franchisor? ___ ___
5. Are you willing to comply with the
provisions outlined in the franchise
contract? ___ ___
6. Do you enjoy competition? ___ ___
7. Do you have will power and self
discipline? ___ ___
8. Do you plan ahead? ___ ___
9. Do you like people? ___ ___
10. Do you get along well with others? ___ ___

Personal Conditions

These questions cover the physical, emotional and financial
strains you will encounter operating a franchise.

1. Are you aware that running your own
franchise will require working 12-16
hours a day, six days a week, and maybe
even on Sundays and holidays? ___ ___

2. Do you have the physical stamina to
handle the work load and schedule? ___ ___

3. Do you have the emotional strength to
withstand the strain? ___ ___

4. Are you prepared, if needed, to
temporarily lower your standard of living
until your franchise is firmly established?___ ___

5. Is your family willing to go along with
the strains they, too, must bear? ___ ___

6. Are your prepared to invest, and possibly
lose, your savings? ___ ___

Answering “yes” to any of these questions means that you have
some of the skills needed to operate a successful franchise; a
negative answer means that you may have to acquire these skills
or hire personnel to supply them.


Certain skills and experience are critical to the success of a
business. Since it is unlikely that you possess all the skills
and experience needed, you’ll need to hire personnel to supply
those you lack. There are some basic and special skills you will
need for the particular franchise you purchase. By answering the
following questions, you can identify the skills you possess and
those you lack (i.e., your strengths and weaknesses).

1. Do you know what basic skills you will
need to operate a successful franchise? ___ ___

2. Do you possess those skills? ___ ___

3. When hiring personnel, will you be
able to determine if the applicants’
skills meet the requirements for the
positions you are filling? ___ ___

4. Have you ever worked in a managerial
or supervisory capacity? ___ ___

5. Have you ever worked in a business
similar to the franchise you want
to purchase? ___ ___

6. Have you had any business training
in school? ___ ___

7. If you discover that you don’t have the
basic skills needed for your franchise
will you be willing to delay your plans
until you’ve acquired the necessary
skills? ___ ___

When you complete your self-analysis, discuss your results with
your family and financial advisor. Their feedback can help you
make the right decision. If you all agree that you have most of
the skills needed to operate a successful franchise, then you
should feel comfortable proceeding with your plans. If, however,
they feel you lack most of these skills, then you may need to
consider delaying your plans until you are better prepared. Above
all, be honest and objective with yourself; after all, it is your

A more detailed self-analysis, the “Small Business Entrepreneur’s
Checklist,” is located in Appendix I. This checklist is designed
to assist you in determining what you actually know about
operating a business, and the skills you will need to do so.
Review it carefully before deciding whether or not to purchase a
franchise or to go into business. If you discover that you lack
many of the skills needed to operate a successful franchise, you
may need to take some training courses or hire personnel to
compensate for these deficiencies.

Once you are certain that your reasons for going into business
and the franchise you’ve selected are viable, gather the
information that you will need to make an informed decision from
sources, such as: 1) a directory of franchises, e.g., the
Franchise Opportunities Handbook (published by the U.S.
Department of Commerce), 2) the disclosure document, 3) current
franchisees, 4) other references, such as U.S. Small Business
Administration (SBA), Federal Trade Commission (FTC), Better
Business Bureau, local chambers of commerce and 5) professional

Many new small business owners choose franchising over starting a
new business because it provides easy access to an established
product, reduces many of the risks involved in opening a new
business, provides access to proven marketing methods and in some
instances provides assistance in obtaining start-up capital from
financing sources.

Franchising can be advantageous as well as disadvantageous to
both the franchisee and franchisor. A few of the advantages and
disadvantages are listed below. Study these factors carefully
before choosing the franchise option.


Advantages Disadvantages

– established product – failed expectations
or service

– technical & managerial – service costs

– quality control – overdependence

– less operating capital – restrictions on
freedom of

– opportunities for growth – termination of
– territorial franchisee agreement
right of subfranchisees

– operating franchisee – performance of
no rights other franchisees


Advantages Disadvantages

– expansion – company-owned vs
– limited risk franchised units
– limited capital
– equity investment

– motivation – problems with
franchisee highly motivated recruitment

– operation of non-union business – communication

– bulk purchasing – freedom

– cooperative advertising


During this activity you will:

* Determine if franchising is for you by listing at least
five reasons why you should choose franchising over
starting a new, independent business.

* List sources where you can gather information to help you
make an informed decision on choosing franchising as an
alternative to starting a new business.

* Determine if you have the skills needed to own and operate
a successful franchise.


An important step in making an informed decision about purchasing
a franchise is to know the responsibilities the franchisor is
legally obligated to fulfill. One of the toughest decisions any
entrepreneur faces is whether or not to purchase a franchise. And
while buying a franchise means obtaining a complete system of
doing business, there is no guarantee for success.

Being aware of the franchisor’s responsibilities takes some of
the guess work out of the decision making process. Learn as much
as you can about the franchise and the franchisor’s obligations
before entering a purchase agreement, or even before meeting with
the franchisor or his or her representative to discuss the
possibility of purchasing a franchise.

Fourteen states have franchise disclosure or registration laws
that require the franchisor to prepare documents for submission
to state authorities. The FTC requires in all states that a
lengthy disclosure document, as well as financial statements, be
given to franchisees before purchasing the franchise. In addition
to state filing fees, printing and accounting and legal expenses,
the franchisor must develop internal controls and policies to
ensure ongoing compliance with regulations.

Franchisors are obligated to:

1. Give you a copy of the Uniform Franchise Offering Circular
(UFCO) at least 10 days before you sign the agreement. If
you meet face to face with the franchisor’s
representative and have serious discussions concerning the
purchase of the franchise, the UFCO also must be given to
you at this time.

2. Give you a copy of the franchise agreement, other contracts
and the franchisor’s financial statements. The franchisor,
however, cannot, under federal law, make claims concerning
the amount of money you will make. The UFCO will disclose
estimates of all initial start-up costs.

3. Provide one week of training to you, the franchisee, and
your manager in one of the parent stores, the operational
manual and ongoing support and assistance to you and other

4. Provide guidelines on audits and assignment procedures and
any extra franchisor criteria for approving an assignment
(e.g., ownership rights – franchisee rights to sell the
franchise if it becomes successful).

5. Provide information on franchisee’s initial fees and other
costs (e.g., royalties, promotional fees).

Franchisors should:

6. Provide a marketing plan, promotional materials and area
site selection assistance to franchisees.

7. Provide adequate insurance coverage for franchises.
Insurance coverage generally includes:
– fire insurance
– inventory insurance
– burglary insurance
– workmen’s compensation
– accident and health insurance
– use and occupancy insurance
– general liability insurance
– automobile insurance (may be optional depending on
franchise type)

8. Provide a trademark or service mark that is known, or will
be known through advertising in the geographic area of use.

9. Provide guidelines on the purchase of inventory and
equipment, requirements on restrictions on goods sold and
the terms of agreement and renewal.

Most of these responsibilities are or should be included in the
UFOC document, but since there are no uniform regulations
governing the operation of franchises in any given state, make
sure the UFOC document complies with the FTC’s regulations, and
the regulations of the state in which you plan to purchase the
franchise. Review the UFOC document carefully with your attorney
before signing the purchase agreement.


During this activity you will:

* Identify issues you need to be aware of as a franchisee.


After gathering all the information you will need to make an
informed purchase decision, carefully examine this information
with your attorney, accountant or business advisor ensuring that
it is addressed in the franchise contract. Think carefully about
the level of independence you will maintain as a franchisee and
how comprehensive the operating controls will be. Be very clear
about the cost of purchasing the franchise and the documents that
make up the franchise package.

You can obtain information on franchising from: 1) a directory of
franchises, 2) the disclosure document, 3) current franchisees,
4) other references, such as SBA, FTC, Better Business Bureau,
local chambers of commerce, 5) professional advisors and 6)
reference materials on franchises from the local library.

Your franchise package should contain the following information:

* The full initial costs and what they cover.

* Licensing fees.

* Land purchase or lease.

* Building construction or renovation.

* Equipment.

* Training.

* Starting inventory.

* Promotional fees.

* Use of operations manuals.

* Continuing costs related to the franchisor.

* Royalties.

* Ongoing training.

* Cooperative advertising fees.

* Insurance.

* Interest on financing.

* Requirements regarding purchasing supplies from the
franchisor, and if the prices are competitive with other

* Restrictions as they apply to competition with other

* Terms covering renewal rights and resale of the franchise.

In reviewing the franchise contract with your attorney,
familiarize yourself with the language. Be aware of terms such as
hold harmless clauses, integration clauses and choice of venue or
choice of law provisions. These terms may favor the franchisor
over you if improprieties arise during or after the settlement

Hold harmless clauses – may require that you release the
franchisor from specific acts or violations of state laws.

Integration clauses – may prevent you from successfully
suing for any deceptions preceding the signing of the

Choice of venue or choice by law provisions – are especially
important if the franchisor has headquarters in another
state. These clauses may dictate that you settle all
disputes in your franchisor’s state of residence and settle
your claim under laws favorable to the franchisor.

Other important clauses to consider deal with severance, renewal
and transfer of the franchise.

Again, use professional help when examining the franchise
contract. And, remember some of the contract terms may be
negotiable. Find out which terms are negotiable before you sign;
otherwise, it will be too late.


During this activity you will:

* List some of the information that should be contained in
the franchise package.

* Identify sources where you can obtain information on what
the franchise package should contain.


The franchise contract, like the UFOC, is a very important
document. The contract is probably the most important document in
the transaction process. It is a legal commitment which is
binding on both the franchisor and franchisee. In the franchise
contract, the franchisor’s promises must be presented to the
franchisee in writing and subjected to careful scrutiny. During
this stage of the buy/sell process, the franchisee must have
competent legal advice regarding the meaning and effect of the

When reviewing the contract, you and your attorney will need to
determine if it confirms what you have been told. If you find
improprieties in the contract at this point, you may decide to
withdraw from the transaction before committing your time, energy
and money to an agreement that may not be beneficial for you. If,
however, you choose to continue with the process, you may be able
to negotiate favorable terms, but remember by signing the
contract, you are legally bound by the provisions of the

The franchise contract consists of two main parts: 1) the
purchase agreement and 2) the franchise or license agreement. For
convenience, occasionally the franchise transaction is split into
two stages. When this happens, some franchise companies have two
contracts, one for each stage, rather than a single contract.
While it isn’t necessary to have two contracts, it can be the
better method where there is a comprehensive equipment and
initial services package.

The purchase agreement of the contract covers:

* the franchise package
* the price
* the services to be provided.

The franchise or license agreement covers:

* the rights granted to the franchisee
* the obligations undertaken by the franchisor
* the obligations imposed upon the franchisee
* trade restrictions imposed upon the franchisee
* assignment/death of franchisee
* termination provisions.

A brief explanation of each agreement follows.


1. The franchise package. Consists of an equipment or inventory
list. This list must contain all the items the franchisee has
been told to expect. Some franchise companies regard this list as
being confidential and stipulate in the contract that it must be
so treated.

2. The price. The price and the manner of payment will be
specified. This may be cash on signature, although rare. More
often a deposit is required on signature with payment of the
balance to follow on delivery of the equipment or at other stages
of the transaction.

3. The services to be provided. This section outlines or lists
the franchisor’s responsibilities to the franchisee. Those
services the franchisor is required to provide the franchisee
before he or she is ready to open for business are called the
initial services. Those services the franchisor provides
periodically are called continuous services. A more detailed
explanation of the services provided by the franchisor are
included in the next section on the license agreement.


1. The rights granted to the franchisee. The franchisee will be
given the right as it applies to particular circumstances. As a
franchisee there are certain rights that are extended to you.

Your rights include:
* use of trademarks, trade names and patents of the
* use of the brand image and the design and decor of the
premises developed by the franchisor.
* use of the franchisor’s secret methods.
* use of the franchisor’s copyright materials.
* use of recipes, formulae, specifications and processes and
methods of manufacture developed by the franchisor.
* conducting the franchised business upon or from the agreed
premises strictly in accordance with the franchisor’s
methods and subject to the franchisor’s directions.
* guidelines established by the franchisor regarding
exclusive territorial rights.
* rights to obtain suppliers from nominated suppliers at
special prices.

2. The obligation undertaken by the franchisor. This item in the
contract tells prospective franchisees what the franchisor will
do for them both before and after start-up. That is why this item
frequently refers to specific contractual obligations detailed in
the franchise agreement, which is attached to the UFOC.

3. The obligations imposed upon the franchisee. Certain
obligations are required of you by the franchisor. These
obligations include:

* to carry on the business franchised and no other business
upon the approved and nominated premises.
* to observe certain minimum operating hours.
* to pay a franchise fee.
* to follow the accounting system laid down by the
* not to advertise without prior approval of the
advertisements by the franchisor.
* to use and display such point of sale advertising materials
as the franchisor stipulates.
* to maintain the premises in good, clean and sanitary
condition and to redecorate when required to do so by the
* to maintain the widest possible insurance coverage.
* to permit the franchisor’s staff to enter the premises to
inspect and see if the franchisor’s standards are being
* to purchase goods or products from the franchisor or his
designated suppliers.
* to train your staff in the franchisor’s methods to ensure
that they are neatly and appropriately clothed.
* not to assign the franchise contract without the
franchisor’s consent.

4. Trade restrictions. The restrictions imposed upon a franchisee
may prohibit him or her from carrying on a similar business
except under franchise from the franchisor, taking staff away
from other franchisees, carrying on a similar business in close
proximity to other franchised businesses within that chain, and
continuing, after termination of the franchise contract, to use
any of the franchisor’s trade names, secrets, and so forth.

5. Assignment/death of the franchisee. The franchisee should
ensure that in the event of death his/her personal representative
or dependent will be able to keep the business going until one of
them can qualify as a franchisee, and that arrangements can be
made to keep the business going until a suitable assignee can be
found at a proper price.

6. Termination provisions. The termination of a franchise is an
event heavily regulated by the franchise laws of 17 states.
Franchise relationship laws in many states specify the conditions
under which a franchisor may terminate or refuse to renew the
franchise, imposing a standard of “good cause,” “reasonable
cause” or “just cause” as defined by those laws. Minimum advance
notice usually has an opportunity to cure the default and avoid
termination; notice ranges from five days to 90 days. Many states
also specify circumstances under which the standard notice and
cure requirements need not be met.

In view of the close working relationship that must exist between
the franchisee and franchisor all provisions must be stated
clearly in the contract. In this transaction, no small print
should exist. Make sure, if possible, the franchise contract
contains provisions that are favorable for both you and the

During this activity you will:

– List at least four rights and four obligations you as the franchisee
are entitled to and required to fulfill.


A. Business Planning and Management Limitations

B. Market Analysis

C. Marketing Strategy

D. Financial Controls

E. Personnel Function

F. Operation, Organization and Special Areas



A. Business Planning and Management Limitations

1. Do you know your own personal management assets and

___ yes ___ partially ___ no

2. Do you have a written small business plan covering 1 to
5 years?

___ yes ___ partially ___ no

3. Can you concretely define what product or service
franchise you are in?

___ yes ___ partially ___ no

4. Can you describe in writing what business franchise you
are in?

___ yes ___ partially ___ no

B. Market Analysis

5. Do you know in detail what factual market conditions and
government requirements impact on your franchise?

___ yes ___ partially ___ no

6. Do you know your specific geographic and demographic
market areas?

___ yes ___ partially ___ no

7. Do you know your market area business and franchise
competitor by name, organization, size and gross sales?

___ yes ___ partially ___ no

8. Can you describe in writing the strengths and weaknesses
of competitors in your defined market areas?

___ yes ___ partially ___ no

C. Marketing Strategy

9. Can you identify in a written business plan what
advantages your franchise’s products or services have
over specific competitors?

___ yes ___ partially ___ no

10. Based on the guidelines from the franchisor, can you
describe in writing how your products and services are
distributed or sold?

___ yes ___ partially ___ no

11. Based on the guidelines from the franchisor, do you know
what sources of supplies and costs are required to
operate your franchise?

___ yes ___ partially ___ no

D. Financial Controls

12. Can you detail the specific monthly cash and credit
requirements of your franchise?

___ yes ___ partially ___ no

13. Do you maintain a file of and stay aware of the
advantages of small business computer planning,
accounting, financial management and marketing controls?

___ yes ___ partially ___ no

14. Do you use Standard Financial Industry Ratios as a guide
to measure your franchise’s annual performance?

___ yes ___ partially ___ no

15. Do you maintain written costs of sales, breakeven
analyses, profit and loss statements and appropriate
accounting journals?

___ yes ___ partially ___ no

E. Personnel Function

16. Do you know how much personnel money your franchise
spends on human resource development as compared to

___ yes ___ partially ___ no

17. Do you know exactly what employee benefits cost your

___ yes ___ partially ___ no

Do you know the impact when compared with industry

___ yes ___ partially ___ no

18. Based on guidelines from the franchisor, do you have a
detailed personnel plan for the management staff,
clerical and specific labor (i.e., part-time, union)
required to operate your franchise?

___ yes ___ partially ___ no

F. Operation, Organization and Special Areas

19. Based on guidelines from the franchisor, do you have a
detailed building or facility plan which documents the
space required to operate the business?

___ yes ___ partially ___ no

20. Do you know why your business is a franchise and the
legal limitations or advantages of this business form?

___ yes ___ partially ___ no

21. Do you use specialized consultants on a pre-planned
basis for accounting, legal, tax, insurance, employee
benefits and other critical business operational areas?

___ yes ___ partially ___ no

About author

SMB Reviews
SMB Reviews 473 posts

SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

You might also like


Using Social Media to Grow Your Business

Once upon a time having a stack of flyers to tack up on a bulletin board and running an ad in the local free press would have placed you in


Increasing Trade Show Event Traffic

We’ve all seen them. Those dull booths at a trade show or in a convention hall that have a banner that says something about an organization of which few people


Successful Internet Marketing Requires Follow-up Marketing!

By Jeffrey Spencer Experts say that the average sale takes about seven contacts before it’s closed. If you are contacting your sales leads only once (i.e. by mail, phone, or


No Comments Yet!

You can be first to comment this post!