This post is sponsored by Transworld Business Advisors of North DFW
To own a business is the dream of most people with ambition… But, why? Is it job security? Financial independence? Or the ability to control your own destiny? Yes, yes, and yes, but let’s dive deeper to see if a franchise is the business opportunity calling your name.
Every industry has their own language and the industry of buying and selling franchise businesses is no different. Understanding the basic terminology can help get you started on the right foot. Transworld Business Advisors, with Tiffany Swartz and David Cheek, is here to help you every step of the way, so let’s start with a few commonly used terms.
Franchising is a form of business by which the owner of a product or service expands or obtains distribution through affiliated dealers (also known as franchises).
A franchisor owns the rights and trademarks of a company and then allows a third party (the franchisee) to use these rights and trademarks to conduct business at a franchise location. In return for a fee, the franchisor (owner) grants the rights to operate a branch of the business under the names, brands, and associated aspects of the business. The franchisor ultimately owns the brand and proprietary knowledge of the specific business entity.
A franchisee is the person or party that is purchasing the right to use a business’s trademarks, associated brands, and other proprietary knowledge in order to open a branch. The franchisee invests in their location and use of the brand and any intellectual capital inherent in the brand as long as they adhere to the business rules and payment structure the franchisor requires to be brand compliant.
The franchise fee (also called the “initial franchise fee”) is the payment made by a franchisee to the franchisor for joining the franchise system. This is the initial payment that the franchise makes to the franchisor when they become a franchise. The franchise fee is typically a one-time upfront flat fee, paid upon signing the franchise agreement for the right to use the brand name of the franchise. This payment acts as compensation to the franchisor for the initial training and support for new franchisees. The amount a franchisor sets as their franchise fee varies from industry to industry and even within franchisors in the same industry.
A royalty fee is a payment made from the franchisee to the franchisor to compensate for the use of the franchise brand. The use of royalties is common in franchise situations where an original owner chooses to sell his product to a third party in exchange for royalties from the future revenues it may generate. Royalties are often expressed as a percentage of the franchisee’s revenues. Many factors affect the royalty rate including exclusivity of rights, risks involved, market demand, technologies involved, and the level of innovation the product or service provides the franchisee.
Many franchisors grant their franchisee an exclusive area or territory, where no other franchises belonging to the same underlying business can set up shop. These territories are commonly known as protected territories, or areas of protection. As the name suggests, the purpose of a protected territory is typically to prevent internal competition and to protect franchisee sales from being cannibalized by other locations utilizing the same brand in close proximity. Protected areas or territories may be defined by a radius in miles, postal codes, or cities. Territories are protected for a specified amount of time and agreed to in the franchise agreement.
Because no two franchisor’s operations or agreements are the same, it’s vital that prospective franchisees obtain the assistance of knowledgeable and experienced franchise professionals. Transworld Business Advisors can help you identify any problem areas in the contracts, or franchise agreement, that can lead to confusion and future disputes over the franchise agreement.
CEO of Transworld North DFW Tiffany Swartz says,
We talk with a lot of corporate people who think that franchises are ‘safe.’ They think they can just drop $500,000 into a business and it will run itself. A franchise is just as much work as any other business… Yes, you typically have a brand name and a support system in place, but there’s no avoiding the ‘hustle’ it takes to get a business off the ground.”
“Most buyers (about 80%) purchase a DIFFERENT business than the one they initially inquire about or express interest in.”
Tiffany and David have some advice on things to consider when buying into a franchise opportunity:
- Past experience… both yours and the franchise’s
- Your personal preferences and passion topics
- Availability of capital
- Your goals and objectives
- Your family considerations
To start, Transworld conducts a comprehensive plan for your franchise search with questions like…
- What’s your timeframe to purchase?
- Do you have an industry preference?
- What’s your geographic preference?
- Is there a particular business type you want to focus on?
- What size of business would you like to be involved with?
- What levels of risk are you willing to take?
- Will you be an “absentee” owner or more hands-on?
- What’s your budget for initial investment?
- What are your cash flow requirements?
With all these questions in mind, CEO Tiffany Swartz and President David Cheek will create an all-inclusive search plan to help you find the right franchise for you.
Transworld Business Advisors of North DFW is a part of the International Franchise Professionals Group. With access to over 400 different franchises that they can promote and sell, you as the buyer don’t have to pay at all for the consulting advice and the buyer has access to additional benefits when a broker negotiates the deal.
“Owning a franchise allows you to go into business for yourself, but not by yourself.”
- Are you willing to adhere to guidelines? Brand consistency and uniformity is what makes a franchise work. Customers expect a consistent level of quality and service at each franchise location. In order to ensure this customer experience, franchises articulate rules in handbooks and training programs. Adhering to a franchise’s policy requires a willingness to follow rules, relinquishing some decision-making, and a readiness to accept feedback and direction. Like any business, managing the day-to-day operations of a franchise is up to you.
- Are you willing to learn new skills? A franchise’s proven system also means that you will receive training and support that traditional business owners do not have. This can be a great opportunity if you are willing and able to learn new skills. Owning a franchise also means that you are not completely alone as a business owner; you have an experienced corporate support system and a network of fellow franchisees to assist you with any issues you may have.
- Are you able to pay upfront costs? As with opening any business, starting a franchise requires some upfront costs. In addition to a franchising fee, which allows you to use the franchisor’s trademark, you may have to pay for normal business costs such as inventory and a lease. Fortunately, obtaining loans for a franchise is often times much easier than obtaining loans for a completely new independent business. Since over 90% of all franchisees are still in business after five years, lenders can see proof of a tried and tested, profitable business. In a broader sense, opening a franchise comes with significantly less risk than opening a completely new business, as customers who have been to another operation will be more inclined to visit yours.
Transworld Business Advisors is here to help you map your way through a potential franchise opportunity. If you invest in one of their proven franchise opportunities, and follow the system the franchisor has put in place, you should be on your way to running a successful business.