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Franchising is a system of distributing a product or delivering a service in return for a fee. The company that manufactures the product or originally developed the service and that appoints others to use its name and sell the products or service is called the "franchisor". The person that contracts with the franchisor and is granted the right to market the goods or services, according to the franchisor's established practices and upon paying franchise fees, is called the "franchisee".

Franchising can be an attractive alternative if you are interested in starting a business. If you are a small business owner interested in expanding your distribution, franchising may also be a valuable option. There are advantages and disadvantages for both franchisors and franchisees using this system.

Advantages and Disadvantages of Franchises

For franchisors, the advantage is gaining additional outlets for the distribution of products and services without many costs associated in establishing new facilities, such as hiring employees and acquiring facilities and equipment. Also, a franchisor may require the payment of an up front franchise fee, providing immediate revenue. The disadvantages for the franchisor include compliance with complex and time consuming federal and state regulations. To establish a franchise operation, it is important to seek out a lawyer who is familiar with this area. Most importantly, the franchisor must disclose much historical and financial information about the franchise business.

There are many benefits for franchisees. Buying a franchise allows you to acquire an interest in an established business, usually with a recognised name and the benefit of national or local advertising. Franchisors usually provide training and purchasing benefits not normally available to independent small businesses. Often, the franchisor will grant the franchisee the right to use a recognized trademark and will advertise it nationally or locally. On the other hand, a franchise business takes a high degree of personal involvement by the franchisee. The franchisee is also restricted in many ways because he will be subject to the dictates of the franchisor in terms of many facets of the operation of the business. The franchisee may define opening and closing times, product standards, service standards, warranty standards and place restrictions on the franchisee's territory and ability to sell the business. While success will depend in large part upon the abilities of the franchisee, the most important factor is usually the size of the market or value of the service developed by the franchisor.

Considerations for Franchisees

If you are considering buying a franchise, use great caution. Make sure that you carefully read the circular provided by the franchisor. Also, carefully review the proposed franchise agreement.

Are you provided a territory exclusively so that new franchises can't take your business?

Must you participate actively in the business or can you be an "absentee owner"?

Can you transfer the franchise to someone else?

What are the conditions for terminating and renewing the agreement?

Does the franchisor have a recognised, protected trademark that you can use?

Talk to other franchisees about the pros and cons of the business and what it is like to deal with the franchisor. Be particularly wary of promises of great earnings.