What is franchising, and how does it work?
Franchising is a broad term that describes a relationship between two or more parties. In general, the purpose of the relationship is to distribute goods and/or services. The two primary types of franchise systems in the United States are product or tradename franchising and business-format franchising. Product or tradename franchising is franchising in its most limited form: A manufacturer grants another party a license to sell goods produced by the manufacturer. Principal examples of this form of franchising include sales of cars through dealerships, gasoline through service stations, and soft drinks through local bottlers.

With business-format franchising, a business owner, the franchisor, allows someone to market products or services using the business name and trademark and prescribed business format (thus the name business-format franchising). In return for use of the name and system, the individual, or franchisee, pays a fee and, usually, an ongoing royalty (in the form of a percentage of sales). Moreover, the franchisee pays all the costs of going into business.

An additional type of franchising is called conversion franchising. This is an adaptation of business-format franchising designed to bring formerly independent businesspeople the collective power of a national name and national advertising. A well-known and very successful example of a conversion franchise is Century 21, an affiliation of previously established real estate agents who have become the leader in their industry through the collective power of franchising.

Here are samples of the various types of franchises:

• Product or tradename-Ford dealerships, Shell stations,
  Coca-Cola bottlers
• Business-format-McDonald's, AAMCO Transmission,
  Molly Maid Conversion-Century 21, Econo Lodges of America

What is a franchise agreement?
Federal laws and the laws of many states require that every franchise company submit to prospective franchisees a document that specifies in detail the terms under which franchisor and franchisee will do business together. This contract is commonly known as the franchise agreement. By establishing standards of operation, the agreement helps to both alert a franchisee as to what is expected of him or her as well as to ensure system-wide uniformity throughout a franchise. This material presented can be a bit daunting, but it can help you make the most informed final decision possible.

The franchise agreement is given to a prospective franchisee at the same time as the offering circular. Your attorney will need to review the agreement. Below are just a few of the issues you will see covered in a franchise agreement:

• Terms--How long is the agreement to be in effect? Five years? Twenty years? Forever?
• Maintenance and repair--Clauses that require franchisees to make certain repairs and upgrades to keep their units up to current standards.
• Insurance-Sections that require franchisees to have certain types of insurance such as general liability, worker's compensation, and property insurance.
• Acknowledgement of receipt of documents-FTC Rules state that the prospective franchisee must be presented with an offering circular 10 business days before the execution of a franchisee agreement or payment of any money and a completed franchise agreement five business days before acceptance.

Why buy a franchise?
Franchising offers individuals an excellent shot at attaining the American dream of owning a business-but with much of the risk removed. In effect, the franchisee is able to launch a new business without any of the usual growing pains. Someone else has already made-and corrected-the most important mistakes, ironed out most of the wrinkles, and invented a working system.

There is that additional comfort level that franchisees derive from the availability of ongoing support services-the knowledge that while they are in business for themselves, they never are in business by themselves. It also means being able to benefit from collective purchasing power and advertising programs.

What is a UFOC?
The FTC Rule was created and adopted in the mid-1970s to meet the needs of the states that required disclosure on the part of the franchisor. Essentially, it requires that franchisors furnish prospective franchisees with very specific information about themselves, the business, and the terms of the franchise relationship. A franchisor's Uniform Franchise Offering Circular (UFOC) provides vital and legally required information about the franchisor and its franchising program.

In addition to providing a format for disclosure (although one not as comprehensive as the UFOC), the FTC Rule defined the type of business relationship that is considered a franchise and exempts, among others, such relationships as membership in retail-owned cooperatives and the granting of single-trademark licenses.

The federal government's attempt to regulate franchising activity with the FTC Rule did not diminish the states' authority to do so, and was in fact stated to be a minimum standard on which states could add additional protection as they saw fit. The FTC Rule allows franchisors to comply with the Uniform Franchise Offering Circular in lieu of the FTC format document. The penalties for failing to comply with the FTC Rule are severe.

HOW WIDESPREAD IS FRANCHISING?

The answer may surprise you. In 2000, most analysts estimated that franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries. Moreover, franchising is said to account for more than 40 percent of all U.S. retail sales. Industry analysts estimate that franchising employs more than 8 million people, a new franchise outlet opens somewhere in the U.S. every 8 minutes, and approximately one out of every 12 retail business establishments is a franchised business.

HOW CAN I BE SURE I WON'T LOSE MONEY?

No one can be 100 percent sure. Although the majority of franchisees are satisfied, successful business people, some do suffer financial losses. That's why you must be particularly wary of any company which "guarantees" profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of earnings claims, you must recognize that your success can come only through hard work. Success or failure ultimately depends on you.

HOW DO YOU EXPLAIN THE SUCCESS RATE
FOR FRANCHISED BUSINESSES?

"Success" is a subjective term. A September and October 1997 Gallup Organization study on franchise owner’s and attitudes towards their franchise experience revealed that more than nine of ten franchise owners stated that they considered their franchise to be somewhat or very successful. Two of three respondents said that they would not have been successful if they tried to open the same business on their own. The franchising system is designed to provide a formula for operating a successful business. Unavoidable business mistakes have been worked out of the system through experience and the franchisor is available to assist when new challenges arise. The Small Business Administration says most businesses fail from lack of management skills. With a franchised business, your franchisor should be eager to help you overcome problems. Your hard work and the franchisor's expertise spell a strong partnership.