Franchise Direct's Pocket Guide to Franchising

Franchise Direct USA 

335 Lenox Rd, Suite 750 

Atlanta; GA; 30326 

www.FranchiseDirect.com ©Copyright 2012 Franchise Direct. All Rights Reserved

Franchise Direct's Pocket Guide to Franchising 

Thank you reading our pocket guide to franchising! 

The purpose of the guide is to provide an overview 

of franchising and help you as a prospective franchise 

buyer. We hope you find it to be a great resource as 

you explore the possibilities that franchising has to offer. 

The information contained in this publication is for 

informational purposes and general guidance only. 

Every effort has been made to ensure that its 

contents are accurate. 

Please note that no business method or industry 

sector can guarantee success, and franchising is 

no exception. The information contained in this 

booklet is designed to assist you in asking the right 

questions and seeking the right advice to make the 

right choice for you. However, ultimately, it is your 

investment that is at stake. 

The information and guidance contained, or referred to, 

in this publication are generic and, in likelihood, does 

not apply to all franchise systems. The specific 

circumstances of individual cases may differ, as may the 

correct course of action to take in those specific 

circumstances. 

Franchise Direct cannot accept responsibility for 

decisions taken as a result of the information contained 

within this booklet. For any investment listed on 

Franchise Direct or elsewhere, it is up to the prospective 

buyer and user to thoroughly investigate any listing or 

company, obtain the appropriate disclosure documents, 

and seek expert consultation prior to making any 

investment decisions. 

All contents of this booklet are the copyright of Franchise Direct. 

All rights reserved. Any reproduction of any content without permission is strictly prohibited. 

1 





Table of Contents 

A Look at the Popularity of Franchising.......................................................................................................3 

Steps to Owning a Franchise........................................................................................................................4 

Franchising 101............................................................................................................................................5 

Franchises vs. Business Opportunities.........................................................................................................6 

Why Buy A Franchise?.................................................................................................................................7 

Assessing Yourself........................................................................................................................................8 

Finding Franchise Opportunities..................................................................................................................9 

Understanding the FDD.............................................................................................................................10 

Franchise Costs..........................................................................................................................................11 

Initial Investment Costs.........................................................................................................11 

Ongoing Costs........................................................................................................................12 

Financing Your Franchise...........................................................................................................................13 

Tips for a Successful Meeting with Lenders...............................................................................................14 

Learning from Other Franchisees...............................................................................................................15 

Signing the Franchise Agreement..............................................................................................................16 

Minorities and Franchising........................................................................................................................17 

Women and Franchising............................................................................................................................18 

Veterans and Franchising...........................................................................................................................19 

Retirees and Franchising............................................................................................................................19 

Home-based Franchises.............................................................................................................................20 

Part-time Franchising.................................................................................................................................21 

Alternative Modes of Franchising..............................................................................................................22 

Final Advice................................................................................................................................................23 

Common Franchise Terms..........................................................................................................................24 

2 





A Look at the Popularity of Franchising 

Nationally 

In the United States, approximately one of every 12 businesses is a franchise, and hiring within this 

business sector has outpaced the national average in recent years. 

In fact, the number of workers employed by franchises now exceeds the number of workers employed in 

major industries such as durables manufacturing, finance, insurance, and real estate. It’s estimated that 

franchising provides nearly 18 million jobs and contributes over $2.1 trillion to the economy. With 

statistics like these, it’s not hard to see why numerous business leaders and government officials view 

franchising as one of the top ways to promote economic recovery through its job creation potential. 

So why is franchising such a popular business model? Part of the answer lies in the advantages gained 

by both parties of the franchise agreement. 

For the franchisor, franchising is a way to economically expand compared to adding additional companyowned 

outlets because the franchisee is responsible for a great deal of the financial investment. On the 

other side, by investing in a franchise, a franchisee gains the advantage of the knowledge and 

established systems that the franchisor is already entirely familiar with. In addition, the franchisee will 

also be provided training and support from the franchisor. 

Abroad 

Going international is very attractive for franchisors because approximately 95 percent of potential 

consumers in the world are outside of the United States. 

Fifteen years ago, few franchisors beyond the large-scale 

ones were operating internationally. Nowadays, 32 percent 

of the franchise units operated by the top 200 franchisors in 

the United States are outside of the U.S. That number 

represents a 33 percent jump in the number of international 

units operated by those franchisors in the past 10 years. 

Franchise businesses have quite a bit to offer emerging 

markets because they are designed to be replicated. Thus, 

they require less experienced entrepreneurs and provide 

business-learning opportunities within a support structure. 

All of this can help emerging market countries further 

develop their economies. Additionally, within emerging 

markets there are hopeful entrepreneurs that are generally 

eager to learn business principles through the methods and 

procedures franchisors have to offer. 

Organizations such as the International Franchise Association and the International Trade Administration 

branch of the U.S. Commerce Department offer many resources to franchisors who seek to operate 

internationally. 

3 





Steps to Owning a Franchise 

Below are 10 steps that provide a general overview of the steps involved on the path to franchise 

ownership: 

1. Gain a deeper understanding of franchising by researching and familiarizing yourself with 

franchising as a way of doing business. 

2. Know what your own financial situation and objectives are to determine if franchise ownership is 

a workable option for you. 

3. Examine your own motives, temperament, lifestyle preferences, health, family obligations, likes 

and dislikes to be sure you are realistic about undertaking a particular type of business. 

4. Look for franchises that match your requirements and preferences, and then compare several 

similar opportunities to narrow down your choices. Talk with other franchisees to get a hands-on 

practical viewpoint on the pros and cons of the business. 

5. Establish a business relationship with an accountant to review your finances, and a lawyer to 

review the legal obligations involved in franchising. 

6. Contact the franchisor and request the Franchise Disclosure Document (FDD). Carefully examine 

this with your accountant and attorney to assess the business proposition and its earning 

potential. 

7. Find an appropriate location based on your target market, the competition and capability to 

meet any site requirements stipulated in the FDD. 

8. Do the research on the industry, the market segment and competition in your specific area. 

9. Write a credible business plan to present to the franchisor and potential financial lenders. 

10. Carefully review the Franchise Agreement with your accountant and lawyer to ensure it matches 

the FDD. Make sure you understand all the terms, and see if any of the terms can be altered and 

made more favorable for you as the franchisee. 

4 





Franchising 101 

The modern-day concept of franchising originated in the 1850s with Isaac Singer seeking to distribute his 

sewing machines outside of his immediate area. He also wanted to provide training to customers on the 

proper way of using them. As a result, he began selling licenses to entrepreneurs in different parts of 

the country – the predecessor of the current franchise agreement. Since then franchising has grown into 

a prominent feature of the American business landscape. 

Franchising can be defined in many different ways. For our purposes, we will use the definition for a 

franchise provided by the International Franchise Association (IFA), which is: 

Franchising can be described as a pooling of resources and capabilities. The franchisor contributes the 

know-how and experience while the franchisee contributes the supplementary capital investment, 

motivated effort and operating experience in a variety of markets. Franchising is a comprehensive 

business relationship, not just a buyer-seller relationship. There is considerable interdependence 

between the franchisor and the franchisee. 

One of the most widely held misconceptions about the franchising industry is that it’s dominated by 

companies with large operations. While, it’s true that the most popular franchise businesses such as 

McDonald’s and Subway have outgrown their humble beginnings and are now huge entities – operating 

thousands of units in numerous countries – the vast majority of franchise businesses are truly small 

businesses, with most having fewer than 100 units. As a matter of fact, even the 

large-scale franchise operators are made up of smaller master franchisees who own 

several outlets individually, along with true small business owners who own one, or 

just a few, franchised businesses. Essentially, franchising is a time-proven pathway 

for small business development. 

An additional attribute of franchising is that it’s extremely diverse. Despite its 

association with fast food, franchising is not confined to a narrow range of business 

segments. Name an industry and there’s likely a franchise in it. 




www.FranchiseDirect.com ©Copyright 2012 Franchise Direct. All Rights Reserved 

5

Franchises vs. Business Opportunities 

Business opportunities and franchises are two ways to start a business without having to start from 

scratch. While they are similar, they have distinct differences that should be acknowledged. 

Business Opportunities 

A business opportunity is the sale or lease of any product, service, equipment, etc. that will enable the 

purchaser to begin a business. Business opportunities cover a broad spectrum of careers, and include 

the following: 

● Turnkey Operations 

● Distributorships 

● Dealers 

● Network/Multi-level Marketing 

● Trademark/Product Licenses 

● Rack Jobbers 

● Vending Machine Routes 

● Work from Home Opportunities 

With the purchase of a business opportunity, the buyer owns the business outright and can customize 

virtually all aspects of the business to their tastes. When an entrepreneur contacts an entity selling a 

business opportunity, they are contracting with that licenser for a business system including training, 

equipment or a service method that the licenser has cultivated and made profitable. Traditionally, once 

the purchase is finalized, and training – if applicable – is completed, the relationship is over. 

Franchises 

A franchise is defined as the right or license granted by a company (franchisor) to an individual or group 

(franchisee) to market its products or services in a specific territory. 

Three common types of franchises are: 

Product: The franchisor grants the franchisee permission to sell/distribute a product using their 

logo, trademark and trade name. 

Manufacturing: The franchisor permits the franchisee to manufacture their products (i.e. food) 

and sell them using their trademark and name. 

Business Format: Probably the most popular form of franchising. The franchisor licenses their 

brand to a franchisee for use with a predetermined way of conducting business. 

When the purchase of a franchise is made, the purchaser is required to comply with strict guidelines and 

rules regarding the operation of the business. These guidelines are in place to protect others within the 

system and maintain brand consistency. And unlike most business opportunities, costs paid to the 

franchisor don’t end with the initial sale. In exchange for these payments, the franchisee will receive 

continued support, such as marketing assistance and technical support. 

6 





Picking the Right One for You 

Figuring out what kind of entrepreneur you are and what you’re looking for is important for deciding 

which kind of business you should pursue. Both are good for potential business owners that don’t have a 

unique product or service to bring to the marketplace, but still want to run a business day-to-day. The big 

differentiator is how much support you want. If you’re simply looking for a jumpstart and desire more 

flexibility, a business opportunity is probably the route for you. If you’re looking for consistent support, 

and can handle restriction in the procedures of your business, a franchise might be the path for you. 

Why Buy A Franchise? 

Many people want to be their own boss, but don’t want the task of reinventing the wheel. In 

franchising, someone has already done the work establishing the business, and has ironed out the 

wrinkles. Here are some common benefits of the franchise system: 

The business has already been proven to work. The franchisor and the network of busily trading 

franchisees are testimony to that. 

You are fully trained in all aspects of the business, and sometimes your business partner and/or 

key staff receive training too. 

There is an operating system that can be learned and then implemented to the letter, or with a 

degree of flexibility. 

The brand is established. 

The franchisor helps with finding a good location that will deliver traffic if that’s what is needed 

(e.g. for retail or food outlets) or will be cost efficient if visibility is not paramount (e.g. for 

cleaning or home improvement businesses). 

Marketing tools and ad campaigns are provided, both nationally for the brand and locally for 

individual franchisees. The majority of franchisors also help franchisees make a major local 

impact with a publicized launch of the business. 

Franchisees receive ongoing support from good franchisors, delivered via toll-free numbers, a 

company intranet, newsletters, and regular visits by a representative from the corporate office, 

regional meetings and annual conventions. 

Centralized purchasing is a feature of many franchises where the franchisee benefits from 

discounted pricing on goods for a retail store or ingredients for a 

restaurant and other supplies. 

There are many different types of franchise opportunities available, with various 

investment commitment levels that can range from minimal to more substantial. 

For those not ready to leave their “day jobs,” there are plenty of offerings that 

require only a part-time commitment that grows gradually. Ambitious 

entrepreneurs, who want to totally commit themselves to owning a business, 

have a vast range of choices. 

Like anything else in life, there are pros and cons involved. Do your due diligence 

to ensure the benefits of franchising outweigh the disadvantages in your 

personal situation. 

7 





Assessing Yourself 

To succeed as a franchise owner, you must be able to follow the rules and conduct of the business 

according to the provided instructions. If you find it hard to follow someone else’s rules, then a franchise 

probably does not suit you. 

Recognizing your true abilities, natural preferences, and real limitations is the first step to success in any 

type of business. By having some clear direction as to your goals, personal commitments, and lifestyle 

choices, you’ll have a better idea of the most realistic way to achieve your ambitions, and eliminate 

wasting time on researching franchise choices not suited to your temperament and abilities. To help you 

with your self-assessment, grab a pen and paper, and consider these points to honestly evaluate yourself: 

Your goals: 

Where do you want to be in five years? In ten years? 

Do you want to make a full-time commitment, or start out slow? 

How important is money vs. job satisfaction? 

Are you motivated by personal challenge? 

Your talents, abilities and temperament: 

What activities, such as sports, computers, decorating, etc., do you like to do? 

Are you better at physical or mental tasks? 

Are you good at interacting with people or organizing things? 

Are you an outgoing “people person” or more introverted? 

Are you patient in the long term or eager for fast results? 

Do you prefer to wear business attire, a uniform or casual dress? 

Do you want to be outside and on the go, or work inside the same premises each day? 

Demands on yourself and family: 

What about your physical endurance – can you work long hours on your feet or do you prefer 

sedentary work? 

What is your preferred work schedule – fixed hours or flexible? Do you want to have your 

weekends free? Are you a morning or night person? 

Is your family supportive of this venture? How will it impact their lives? What are your child care 

commitments? 

Do you want clear separation of your business interests from your home and personal life? 

What about leisure time -- do you want to be able to attend evening social gatherings or school 

events? Take time away for vacations? 

Your financial situation: 

Do you have the resources to buy a franchise and survive the initial start-up phase? 

Can you cope with unexpected losses or setbacks? 

What is your risk tolerance? How much of your assets are you willing to put on the line? 

What is your credit history and can you raise financial backing? 

8 





Finding Franchise Opportunities 

Franchises exist just about everywhere, and offer many choices. With so many options, it can be hard to 

narrow your options to a short list of possibilities. The internet is a good place to start your research, as 

are print directories, tradeshows, business-specific publications, and franchise brokers. Here are a few 

resources and directories where you can start your initial search: 

http://www.franchise.org 

This is the official web site of the International Franchise Association. 

http://www.franchisedirect.com 

This directory offers detailed descriptions of franchise opportunities in all 

types of industries, plus other information resources on franchising. 

http://www.franchise-update.com 

Here you’ll find several publications about the franchise industry. 

http://www.franchisetimes.com 

A monthly publication offering articles on different aspects of franchising. 

http://www.aafd.org 

The American Association of Franchisees & Dealers web site is an excellent 

source of legal and financial advice about franchising. 

After your self-evaluation, you should have some idea of the type business 

you want to run, i.e. home improvement, food services, advertising, 

construction, etc. And you should also know how much you can invest and 

how much of your time you can commit. This will help choose the best 

possibilities from the many offerings you’ll find in franchise directories. 

Once you narrow it down to a few choices, you should consider: 

Is it a genuine business format franchise vs. a product distributorship? 

Does the franchisor belong to industry associations such as the IFA 

and AAFD? 

Has the franchised business been proven in practice? 

Is there a strong trademark name or brand? 

If it is a new business, is it a fad? How has it been tested? 

What is the competition and how do prices of the product and services compare to competitors? 

Are the products patented? 

Will the source of products be guaranteed in the future? 

Does the franchisor disclose financial information upfront? 

There are clues that should tip you off as to whether a franchise offering should be avoided. Remember, 

if it sounds too good to be true, then it probably is a misleading presentation. Other signs that signal 

questionable businesses are sloppy web sites with obvious grammar and spelling errors. If a web site 

seems like all hype, then it probably is just that. And don’t fall for overly aggressive marketing that bullies 

the prospective buyer into acting fast without time for careful examination of the business. 

9 





Understanding the FDD 

A very important step in the purchasing of a franchise business is the review of the Franchise Disclosure 

Document (FDD). Once you’ve narrowed your search down to a small list of options, request the FDD of 

those franchisors to gain an even deeper knowledge of their respective operations. 

A FDD is a comprehensive document that outlines the history of the business, all the franchisees in a 

franchise’s system, turnover rates, terminations, fees, rules, restrictions, and numerous other things 

pertaining to that particular franchise. A FDD is typically hundreds of pages long encompassing 23 Items 

with additional Exhibits following the Items. Franchisors are required by the Federal Trade Commission 

(FTC) to present potential franchisees a FDD at least 14 days before a contract is signed. 

It is strongly recommended that prospective franchisees go over the FDD with a franchise attorney. 

Though a franchise attorney will go over the whole FDD with you, it’s a good idea to review the FDD 

ahead of time for yourself so the issues that you personally need more clarification on are already noted. 

Below is a listing of the FDD Items. 

Item 1: Franchise Operation Overview 

Item 2: Listing of Franchise Principal Executives 

Item 3: Recent Legal Action (franchisees against the franchisor and vice versa) 

Item 4: Relevant Bankruptcy Filings 

Item 5: Initial Investment Costs in paragraph form 

Item 6: Ongoing Fees 

Item 7: Initial Investment Costs in tabular form 

Item 8: Restrictions on the products and services the franchisee can provide in his or her franchised 

business and on the premises of the business 

Item 9: Listing of Obligations the Franchisee Must Adhere To During the Agreement Term 

Item 10: Franchisor Provided Financial Assistance 

Item 11: Comprehensive Look at What the Franchisor Offers to Franchisees in Exchange for Fees Paid 

Item 12: Franchisee’s Territory 

Item 13: Franchisor Trademarks 

Item 14: Copyrights, Patents and Other Proprietary Information of Franchisor 

Item 15 Franchisee’s Personal Responsibilities in the Operation of the Franchised Business 

Item 16: Preferred or Required Vendors 

Item 17 Length of the Franchise Agreement and Provisions for Renewing, 

Transferring or Terminating the Franchise Agreement 

Item 18 Public Figures for the Franchise (i.e. celebrity endorsers) 

Item 19: Financial Performance Information (not required if financial 

performance hasn’t been discussed prior in FDD) 

Item 20: Listing of Current Franchisees in System 

Item 21: Exhibit Location of the Franchisor’s Audited Financial Statements 

Item 22: Listing of the Franchise Agreement Contracts 

Item 23: Denotes Location for the Receipt for the FDD 

10 





Franchise Costs 

Franchises and independent small businesses for the most part share many of the costs associated with starting 

a business. However, franchises do have some special costs associated with them, which are profiled here. 

Franchise costs are commonly divided into two categories: initial (or upfront) costs and ongoing (or continuing) 

costs. Initial costs are the expenses that the franchisee will pay in order to begin operation of the franchised 

business while ongoing costs are the expenses involved in maintaining operation. Franchisors have various ways 

of presenting the costs associated with beginning and maintaining one of their franchised businesses so please 

consult the FDD of a specific company for a complete breakdown of costs associated with investing in that 

franchise. 

Initial Investment Costs 

The initial costs of a franchise can range from a few thousand dollars into the millions of dollars depending 

on the industry, building requirements, equipment needed, and several other factors. The most notable fee 

that varies from franchise businesses to non-franchise businesses is the franchise fee. This fee stems from 

the heart of the franchise model, and helps the franchisor ensure that their business system will be executed 

as consistently as possible across all of their units. Some common initial costs in beginning a franchise 

business across all industries are: 

● Franchise Fee 

● Training Expenses 

● Leasehold Improvements or Real Estate Costs 

● Equipment 

● Professional Fees 

● Advertising/Marketing 

● Working Capital 

The range of investment between different industries can be large, as can the variation within a single 

industry. 

11 





Ongoing Costs 

After the franchise business is up and running, there are a number of expenses required for the 

successful maintenance of the business as well as for being a part of the franchise system. Item 6 of the 

FDD is where the ongoing costs are listed. Like the franchise fee, the royalty fee is a main differentiator 

between a franchise and a non-franchise business. Typically royalty fees are assessed as a consistent 

percentage or flat fee due weekly or monthly, and are predominately assessed for the franchisee to 

continue reaping the benefits that come with being a part of the franchisor’s business system. Common 

ongoing franchise fees include the following among others: 

● Royalty Payment 

● Advertising/Marketing Fund 

● Technology Fees 

● Insurance 

In addition to the regular fees, there are fees 

associated with the franchise system that aren’t 

assessed or collected regularly including: 

● Ongoing Training 

● Transaction Fees 

● Interest 

● Audit 

● Indemnification 

● Renewal Fee 

Due to the depth and variety of franchise businesses, the given fees illustrated in this booklet are only 

the most common and not a complete listing. Additional fees collected by franchisors along with ones 

that are specific to certain industries such as reservation fees for hotel franchises can be found within 

the FDDs franchisors are required to make available to prospective franchisees. Please note that there 

are also ongoing costs not specified in the FDD, but are no less important to the continued operation of 

the franchise like employee wages. 

12 

As you have read, most of the costs of 

beginning a franchise are similar to 

beginning a non-franchise business with a 

few notable differences. Though no 

business venture can be a guaranteed 

success, the features given in exchange for 

the additional costs that come along with 

investing in a franchise can help bolster an 

entrepreneur’s chances of creating a 

successful business. 





Financing Your Franchise 

Items to Prepare Beforehand 

Gaining the necessary financing for your franchise venture can be an overwhelming task, but preparing 

all of your documents in advance can help tremendously in expediting the process. Different institutions 

will more than likely have varying forms and documents they want submitted. The following checklist 

will help you in gathering all of the paperwork that lenders may require to complete your application. 

Personal background 

This includes educational and work history, criminal record, etc. 

Business plan 

All lending programs require a business plan that includes, among other things, projected 

financial statements, balance sheet, cash flow statement, and income statement. 

Personal credit report 

The lender will access your credit report during the loan application process. Remember to 

request a credit report from each of the three national credit-reporting bureaus before you send 

the loan request form so you can review them for accuracy. 

Loan information 

Specify the amount of money you’re requesting, the type of loan, how the loan will be used, and 

the amounts of assets you currently have. 

Business financial statements and income tax return statements for the past three years. 

Bank statements 

Personal and business bank statements for the past 12 months. 

Accounts receivable and accounts payable for the past 90 days. 

Collateral 

Some loan packages do not require collateral. But, if collateral is required, describe what will be 

used to secure the loan. 

Legal documents 

Lenders may require additional documents, such as franchise agreements, business 

license/registration, commercial lease, articles of incorporation, etc. 

Financing Options 

There are several options available to obtain the amount of money 

obligated for the costs of the franchise. Here are the most common 

avenues of financing: 

Financing directly from the franchisor 

Commercial bank loan 

Credit union loan 

Personal savings/Retirement fund 

Angel investor 

Small Business Administration (SBA) loan 

Family/friends 

Grant(s) 

Credit card(s) 

13 





Tips for a Successful Meeting with Lenders 

Do: 

Know your figures inside out. Have them checked and double checked. Asking the potential 

lender for a pencil while working out percentages on the back of a supermarket receipt won’t 

showcase you as the thoughtful and organized business person you are. 

If possible, bring an accountant or well-versed liaison/representative from the potential 

franchisor. You still need to know your business plan and financial documents by rote, but they 

have years of experience dealing with figures and accounts. 

Sell yourself. Include your resume and a small personal history about yourself. Explain why 

you’re passionate about this business model, your experience and your motivation. Convince 

the manager that this is the right franchise for you. 

Use the bank’s planning templates and documents. You can download these from their 

websites, or pop into your local branch to pick some up. 

Research what start-up grants and Small Business Administration loans (if any) are available from 

the government. How much are they, have you applied for them? If you’re not entitled to a 

grant, why not? 

Prepare a worst-case scenario projection along with the more positive ones. Be honest with 

the lender and with yourself. If things turn for the worst you may be liable for a large 

repayment. 

Don’t: 

Forget to bring ID, a utility bill and three months of personal bank statements if you need to 

open an account. 

Ask for the entire amount required to start your business. The Wall-Street Journal reports that 

entrepreneurs generally invest 20% of their own money into the franchise. 

Be late, impolite, impatient, dirty or disorganized. No-one wants to deal with unorganized 

people. These are an instant turn-off. Act like you would on a first date (avoid playing footsie 

however…) 

Leave without arranging another meeting with either the manager or someone else in the 

bank. Hearing “I’ll be in touch” can often be the last words you hear before possibly receiving an 

impersonal rejection letter weeks later. Convince the manager that this is a great idea, and if he 

has any misgivings that you are prepared to 

work through them to produce a solid 

business model. 

Give Up. It is far more difficult to get a penny 

out of the banks for start-ups at the moment, 

so don’t lose faith if you don’t receive 

funding straight away. If you are rejected, 

arrange a meeting to discuss where the 

pitfalls were. Go back to the drawing board 

and revisit your research. 

14 





Learning from Other Franchisees 

In researching franchise opportunities prospective franchisees are presented with a wonderful resource 

when they receive the FDD from a franchisor – the contact information of franchisees already in the 

franchise system. The ability to contact some who have already “been there and done that” is an 

unmatched opportunity to figure out if you want to proceed with investing in that respective franchise 

system. Here are some questions that you can ask current franchisees to gain a clearer understanding of 

what to expect: 

How long have you been in business? 

How long did it take to break even? 

Is your franchise profitable now? 

Has running the franchise been close to how the franchisor said it would be? 

Are you pleased with the ongoing support you get? 

Was the training adequate? 

How would you rate the manuals and systems? 

How responsive is the franchisor when you have questions or suggestions? 

How often do you have contact with other franchisees in the system? 

What is the most negative thing you can say about your experience thus far? 

If you had the opportunity to go back, would you have made the same decision? 

15 





Signing the Franchise Agreement 

You and your lawyer have examined the FDD. You’ve done your research about the franchise, and the 

numbers add up. You’ve spoken with other franchisees in the business, and like what you’ve heard. You 

feel ready to sign the Franchise Agreement. 

The Franchise Agreement is a legally binding contract that stipulates in exacting detail the responsibilities 

and expectations for the franchisor and franchisee. 

Keep in mind that Franchise Agreements are written to be generally more advantageous toward the 

franchisor. Once signed, you are legally obligated to uphold all the provisions of the Agreement, so it is 

absolutely essential that your lawyer review this contract and have everything explained to you in plain 

English. 

Before signing, compare the Franchise Agreement to the FDD to make sure the franchise offering as 

outlined in the FDD matches what is stipulated in the Agreement. If any verbal promises were made to 

you, be certain these are written into the Agreement. Once signed, the Franchise Agreement governs 

your relationship with the franchisor, and any disagreements or misunderstandings will be subject to the 

terms in the Agreement. 

Because it is a legally binding contract, there are certain critical elements typically found in all business 

contracts and some that are unique to franchises. You and your lawyer should carefully scrutinize every 

aspect of the Agreement to be sure you understand all the implications. 

Some Negotiation Tips 

Many franchisors have rigid Franchise Agreements that all their franchisees must sign and adhere to. 

However, some franchisors may be more flexible about negotiating the terms in the Agreement. But, be 

careful – since franchises are all about proven systems and consistency, a franchisor that seems too eager 

to bend the rules may be a sign that the business is in a measure of trouble. 

Items that typically offer room for haggling include: 

Territory rules about exclusivity, future expansion or changes in size 

Grand opening support and resources provided to you 

The training provided to you and possibly your staff 

Rules about transferring the franchise to other franchisees 

Fee schedules and payments 

“Default cure” which governs how much time you have to correct a problem that keeps your 

franchise from operating properly before you are in default of the contract 

The start-up date when you are expected to launch the business 

How the price will be calculated for the franchisor to buy your business once you’ve reached the 

termination date 

Your liability limits regarding franchise performance 

Your lawyer and your accountant are the most familiar with your individual situation, so seek their advice 

about which Franchise Agreement terms you should attempt to alter to make more favorable for you. 

16 





Minorities and Franchising 

According to the 2010 Census, minority groups made up 49% of the U.S. population. On top of this, they 

make up nearly 20% of the franchise industry. The overall percentage of minority groups in the U.S. 

population is growing rapidly, which includes the Asian, Hispanic, African-American, Pacific Islands, and 

African-Indian groups. Research has shown that minorities have made up 80% of US population growth 

in recent years. 

Franchising opens up new opportunities for minority groups to learn new skills, grow and expand their 

businesses, or acquire a new business and in recent years, the IFA and other associations have set up 

programs, to increase the number of minority owned franchise firms. The MinorityFran program and the 

National Minority Franchising Initiative (NMFI) are two such projects that aim to expand the total of 

number of minority franchisors, franchisees, and firms involved in the franchising industry. Both 

programs host minority recruitment conventions that give prospective franchisees the opportunity to 

participate and meet with franchisors, companies, and experts paving the way for minorities to enter the 

franchising industry. 

With increasing numbers of franchise companies becoming active in the recruitment of minority 

franchisees, their commitment to diversity and multiculturalism in the industry, can help minorities 

achieve their dreams of franchise ownership. 

In turn, increasing the number of minorities involved in the franchising industry will help reflect the 

diverse nature of the U.S. population. These rapidly growing American cultures will have a significant 

influence on the development of the U.S. franchising industry in the future. 

MinorityFran Program 

In 2006, the IFA launched a new initiative MinorityFran, which was established to increase the number of 

minority franchisees, franchisors, and suppliers within the franchising industry. The IFA’s Minorities in 

Franchising (MIF) committee helps create awareness in franchising, and encourages minority groups to 

enter into franchising. Participant companies in the initiative receive the information and contacts to 

help them recruit minorities into the franchising system. 

National Minority Franchising Initiative 

The NMFI was established in 1999, to address the under-representation of 

minority groups in the franchising industry in the U.S. The program 

provides information on more than 450 companies involved in increasing 

the number and success of minorities in franchising. Its publication, The 

Minority Franchise Guide, serves as a resource for both minorities and 

franchisors interested in recruiting minorities. 

The organization’s network of organizations, companies, and associations, 

dedicated to minority groups in franchising, combined with its broad range 

of resources, from books and publications, consulting and advisory 

services, and its informative online websites, makes NMFI one of the top 

providers of information to minority groups in the franchising industry. 

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Women and Franchising 

Women and Franchising: Top Franchise Characteristics 

According to Iain Murphy in his book (The Franchising Handbook: The 

Complete Guide to Choosing a Franchise), women are in some ways better 

suited to franchising and make a more attractive group as potential 

franchisees. 

Here are a number of interesting characteristics that make women in 

franchising a successful target group for franchisors: 

Women are good at organizing, at coordinating activities and 

people efficiently. This means women franchisees will be naturally 

inclined to organize and coordinate their franchise opportunity 

more productively and profitably. 

Women are good at prioritizing, at deciding which activities are 

more important than others. This particular skill works well in the 

franchising industry, when problems arise concerning planning, 

staffing, financing and people management. 

Women enjoy working towards a common goal. Women 

operating a franchise will work to make that franchise a success, 

for all franchisees involved under the one franchise operation. 

Women are good at networking, ensuring effective 

communications are created between franchisee and franchisor, 

and franchisee and all other internal and external bodies. 

Franchising can offer women who are ambitious the opportunity 

to go into business and to be potentially successful and profitable 

on a personal and professional level. 

Advantages for women running their own franchise 

In franchising you get to be your own boss, and take control of 

your own life. Women franchisees are more successful because 

they enjoy the work/life balance franchising can offer, making it 

more appealing to be their own boss. 

With 20% of small businesses failing in the first year of business, 

the concept of franchising offers assurance for women, interested 

in minimizing business start-up risks. The tried and tested formula 

helps reduce the risks by providing training, help and support. 

After a career break or pregnancy, women can often feel a lack of 

confidence in returning to the workplace. Franchising gives 

women the opportunity to rebuild their skills and knowledge in a 

supportive and successful environment. 

Franchising offers a tremendous opportunity for ambitious women to 

start their own business. Women and franchising can make a very 

successful combination. 





18

Veterans and Franchising 

In an interview with Franchise Direct, Drew Myers, the head of Recruit Military, spoke about how he 

believes military veterans are ideally suited to franchise opportunities because of the skills they have 

developed during their military career. They are also well disciplined and willing to persevere to achieve 

their goals. These are key personality traits that franchisors look for in potential franchisees. Many 

franchisors have recognized this, and actively seek out veterans to recruit as new franchisees. This 

practice is made even more prominent by the growing number of franchises offering tailor-made veteran 

franchise packages. 

The suitability of their background, combined with funding support available, makes franchising an 

attractive consideration for veterans who might be interested in starting their own business. The IFA 

established a program by the name of VetFran to meet the growing needs of military veterans in the U.S. 

The program brings together hundreds of franchises dedicated towards the promotion of franchising as a 

viable business opportunity for veterans. Typically, although it is not a requirement, franchises offer a 

discounted franchise fee. Some franchises even waive the franchise fee in some circumstances. 

In addition, the Small Business Administration offers the Small Business Association’s Patriot Express 

program. The program accepts applicants from military veterans for business loans to kick start their 

career following transition. The program is not strictly confined to franchise opportunities. Loans are 

available up to $500,000 for business startup, expansion, purchase of equipment, working capital, 

inventory or business-occupied real-estate purchases. 

Retirees and Franchising 

Today’s 50+ population is reluctant to be “put out to pasture.” Instead many people in their 50s and 

beyond dream of owning a business when they leave the traditional workforce. And there is no reason 

that older people driven by the entrepreneurial spirit cannot achieve their dream. For example, Colonel 

Harland Sanders was 62 when he sold the first Kentucky Fried Chicken franchise in 1952. Twelve years 

later, KFC was a popular fast food restaurant with locations throughout the U.S. 

Consider these statistics gathered from a study by the American Association of Retired People: 

The percentage rate of self-employed people rises with age. 

Those who are middle-aged and older make up a large share of all self-employed people, 

with those over 50 accounting for 40 percent of the self-employed. 

Approximately one in three of older self-employed individuals made the transition from 

employee to business owner after the age of 50. 

People older than 55 are the fastest growing group of self-employed workers. 

Franchise companies are recognizing that older, experienced workers retiring from regular jobs are good 

candidates for franchise ownership. They have confidence from the wisdom gained over the years in the 

workforce. They know how to plan ahead and reliably persevere to reach goals. And their experience 

has refined and sharpened their interpersonal skills. 

But before rushing into franchise ownership, retirees must carefully consider just what it is they want do 

in this next phase of their lives. Quality of life should be the first priority, so that factors such as time 

commitment and physical endurance must be carefully weighed. The financial aspect is another major 

influence – as one approaches retirement age, it is unwise to “bet the farm” on any investment. Retirees 

are better off looking for franchises with lower up-front costs and minimal ongoing overhead. 

19 





Home-based Franchises 

In recent years, home-based franchising has become more popular as a range of companies have 

discovered that working from home can be just as effective as having an established office elsewhere. 

Franchisors in several sectors such as consulting, children's services, financial services, computer training 

and repair, cleaning, pet care, photography and travel, are now actively offering potential franchisees 

opportunities to have their headquarters where they live. 

Potential home-based franchisees must check with their local authority to see if there are any rules 

restricting the commercial use of a property and then decide if it is still worth working from home. Some 

towns do not allow businesses to be run from home, or have restrictions on it. For instance, customer 

parking could cause a problem should special permits be required for spaces used commercially. 

If approved, this arrangement can save costs for both franchiser and franchisee, although specialist 

training will be needed to ensure that franchisees will be ready and able to run a successful franchise 

from home, as they will have to adapt to a unique working style. 

It is important that franchisees working from home have in place the right equipment. To make sure 

things are run efficiently, a desk, stationery, posting equipment, notebooks and other items should be in 

a set place. 

Establishing distinct boundaries between the office and living space will help to make the franchise more 

professional. 

It is advisable to have a separate business phone line to keep work and home life apart and if using a 

computer, it should operate at a fast speed so that more work can be done during a day. The same 

applies for an internet connection and email software. 

Franchisees at home must have their office or workspace in an area away from potential distractions 

such as roommates, children, pets and television. 

Having a schedule and sticking to it as closely as possible will also help, including regulated breaks, 

although franchisees should not fall into the trap of working too long because they do not have to travel 

to work, which can be counterproductive and have a negative impact on the business, as well as family 

and friends. 

Those who are self-motivated and can work to these 

conditions should do well as long as the franchise they choose 

is right for them and gives them sufficient training and 

support. However, it can be lonely at times so franchisees 

wanting to work at home are advised to develop a network 

with the company's other home working franchisees and 

business owners in their area. These groups can provide each 

other with useful ideas and vital support. 





20

Part-time Franchising 

Starting a part-time franchise is a great 

opportunity that can lead to the growth and 

development of a successful business. Parttime 

franchising is defined as any franchise in 

which the franchisee works on average 

between twelve and twenty hours a week. 

This work arrangement can be the ideal job 

for an entrepreneur who is looking to start a 

franchise and keep their work-life balance. 

Work-life balance attractions include family 

responsibilities and recreational and leisure 

activities. An individual’s civic responsibilities 

can also increase the need for reduced or 

more flexible working hours. These 

obligations can include volunteer work, 

community work such as local school 

positions and environmental protection jobs, 

or serving on a legal jury. 

Franchisees that are looking to work at their 

own pace, control their own schedule, or 

earn a supplemental income are frequently 

opting for the part-time franchise option. 

Part-time franchises are also good for 

workers who are transitioning from a 

corporate job who don’t want to leap 

directly into franchise ownership, but want 

to phase into their franchise lifestyle over a 

period of time. 

The motivation for starting part-time 

franchises can differ for males and females. 

Research shows that combining work with 

education or leisure time is the main goal for 

male franchisees. Female franchisees prefer 

part-time franchising as it helps balance 

work and family. In this way, part-time 

franchising is an attractive option for women 

returning from maternity leave, people with 

young families, or stay-at-home parents. 

With an increased focus on family-friendly 

work and the work-life balance, part-time 

franchising is a viable option for entrepreneurs and/or first time franchisees. 

21 





Alternative Modes of Franchising 

In most cases, entrepreneurs arriving fresh to franchising would invest in a new, single unit franchise. In 

this type of franchise, the franchisee is only responsible for running one unit where they are involved 

with all of the daily operations of the business. However, there are other ways to enter the franchising 

world. 

Multi-Unit Ownership 

Multi-unit ownership is where the franchisor grants a franchisee the right to operate more than one 

outlet within a defined location. With this right comes the potential for serious money making as well as 

increased responsibilities in operating your businesses. 

Franchisors have high standards in regard to granting multi-unit rights. You must have a proven track 

record of successfully managing a business, with the ability to motivate your staff and continually seek 

performance improvement. If you already own a franchise, expect the possibility of having to make a 

convincing argument in support of your application to own multiple units. Exhaustive research about 

your market and competition for each unit must be done, along with a strict accounting of your own 

personal and professional finances. However, some franchisors do offer a discounted rate on the startup 

costs involved in the case of franchisees opening multiple units. 

Resale Franchises 

You may have opportunities to buy existing franchises from either a franchisee or the franchisor. Often 

you can get a discount on these sales, and since it is an existing business, you can examine all the records 

for sales, costs, and profit margins to make an informed decision. A franchise unit that has changed 

hands repeatedly probably has problems, and you should take extreme care in reviewing its history for 

several preceding years. 

Master Franchisee Licenses 

Another means of expansion in franchising is to acquire a Master Franchise license. This puts you in 

charge of other franchisees within an established territory, which could be as small as a county or as 

large as a country. 

A Master License requires a significant investment, but offers tremendous rewards in return. With the 

Master License, you have the power to appoint and train new franchisees, and the right to collect a 

portion of the fees these franchisees pay to the franchisor. 

As with buying an individual franchise, you will need to do extensive market research before making an 

investment in a Master License. And just as with the Franchise Agreement, you must carefully scrutinize 

all the terms so that you fully understand your obligations and rights as a Master Licensee. Be sure the 

territory is carefully defined. Consult an attorney experienced with licensing contracts. Expect some of 

the franchise units to flounder, and be prepared to step in to help run the operation. 

22 





Area Developer Rights 

In addition to Master Licenses, one can also purchase the right to be an Area Developer. In this case, the 

franchisor enters into an agreement with an area developer to sell a specified number of franchises in 

the area within a specified time. Area Developer agreements are not common in the U.S., but tend to be 

used more for international expansion. 

Final Advice 

Here are five main points to remember when making your decision on which franchise system to invest 

in: 

1. Find an outlet for what you’re passionate about. Virtually all of the franchisees we speak with 

mention how much they love the area they are working in. 

2. Scout your area and match what you want to do with a need in your community. This will 

increase the likelihood of your franchised business being a success. Also, you will be able to take 

advantage of local contacts you’ve garnered over the years. 

3. Finding financing in this economic climate can be difficult. Many traditional avenues of funding 

are either closed or very rough to navigate. As you look at franchise options, honestly audit 

yourself to determine how much you can afford. 

4. Visit other franchisees. During the research process of learning about any franchise you have the 

opportunity to speak to existing franchisees to gain an even clearer idea of what to expect. Their 

names and locations will be provided when you request the FDD of a franchisor. Take advantage 

of this opportunity to learn what happens when you open a franchise, in practical terms, from 

someone who has been there before. 

5. Make sure you really want to be a part of the franchise system. Franchising is for people who 

want to own a business, but don’t want to do it alone. If you are an entrepreneur that values 

independence in making decisions, you will probably find franchising too confining. 

Franchising is a time-tested way for everyday people just like you who have made the decision to run 

their own business. When you’re ready to begin your journey to franchise ownership, browse through 

our listings on FranchiseDirect.com and find a franchisor that suits you most. 

23 





Common Franchise Terms 

Advertising levy 

The advertising levy covers the franchise system’s advertising and promotional activities. 

Agreement 

The franchise agreement is a legal written document that governs the relationship between the 

franchisor and franchisee. It specifies the terms of the franchise contract such as rights and 

responsibilities of the parties, fees and payments, territory and duration of agreement. 

Approved Site 

The approved site is the location that the franchisor chooses, for the franchisee’s set-up, which meets 

the criteria of the franchise unit. 

Area Franchisee 

An area franchisee purchases the right to open and operate a specified number of franchise locations, in 

a defined geographical area, during a defined period. 

Business Plan 

A business plan is a document prepared by a franchisee, which summarizes its operational and financial 

goals and objectives for the franchise, and contains detailed plans and budgets showing how these 

objectives are to be achieved. 

Capital 

Capital is the wealth required by a franchisee. Human capital consists of the franchisees experience, 

leadership, and knowledge he/she will bring to the franchise. 

Collateral 

Collateral is a form of security that the borrower may offer the lender to guarantee a loan or other 

credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. 

Copyright 

Copyright is the exclusive right of a person to use, and to license others to use, works of art, music, or 

literature, and to protect these works from the unauthorized use. This statutory right prevents others 

from copying or exploiting a person’s work without permission. 

Earnings Claims 

Earning claims are the actual or forecasted franchise sales, profits, or earnings stated by the franchisors. 

It is described in Item 19 of the UFOC as the financial performance disclosure. 

Equity 

Equity is the total value or worth of an asset. It is an individual’s or company’s shares and ownership 

rights of an asset, and does not represent an obligation to pay in the future. 

Feasibility Study 

A company that is thinking about becoming a franchisor carries out a feasibility study. 

24 





Federal Trade Commission 

The Federal Trade Commission is an independent agency of the United States government, whose 

purpose is to promote antitrust and consumer protection laws, and to eliminate and prevent 

anticompetitive business practices in the franchise industry. 

Franchise 

A franchise is an agreement in which a firm (franchisor) enters into a contract with other businesses 

(franchisees) granting them the authorization to operate in the distribution of goods and services, under 

the franchisor's trade name and guidance, in exchange for a fee. 

Franchise Attorney 

A lawyer who specializes in franchising law is known as a franchising attorney. 

Franchise Consultant 

A franchise consultant is a business guide with expertise in the franchising industry. They give advice on 

topics such as franchising operations, companies, and relationships. 

Franchise Disclosure Document (FDD) 

The FDD is a regulatory document produced by the franchisor to the prospective franchisee, containing 

the franchise agreement, the disclosure statement, financial statements, and other agreements the 

franchisee will be required to sign. 

Franchise System 

A franchise system refers to the different franchises operating in the USA. 

Franchise Unit 

A franchise unit refers to each individual outlet, whether company owned or franchised. 

Franchisor 

A franchisor is an individual, partnership, or corporation who grants an investor (the franchisee), the 

right to conduct business under their trade name, using their operational methods and organizational 

systems. 

Franchisee 

A franchisee is an individual, partnership, or corporation who purchases the right from the franchisor to 

conduct business under their trade name. 

Initial Investment 

The total investment is the capital required to start the franchised business. 

Initial Franchise Fee 

The initial fee is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise 

agreement. 

International Franchise Association (IFA) 

The International Franchise Association (IFA) is a non-profit trade association of franchisors, franchisees, 

and suppliers. Founded in 1960, the IFA’s office is based in Washington, D.C. 

25 





Licensing 

Licensing is the legal act of one party granting rights to another party to a legally protected property in 

exchange for a fee or royalty. 

Master Franchisee 

A Master franchisee is the individual who negotiates the franchise rights for a defined territory (usually a 

country), and assumes the rights and obligations of the franchisor in that particular territory. 

Marketing 

Marketing is the process or technique of planning, pricing, promoting, selling and distributing products 

and services to create exchanges that satisfy both the customer and the organization. 

Multi-unit franchisee 

A multi-unit franchisee is one that owns and operates more than one unit of the franchise, but does not 

have the rights to a defined territory. 

Operations Manual 

The manual contains instructions advising a franchisee how to operate the franchise. 

Pro Forma 

The Pro Forma document is a description of financial statements which rely on historical data to assume 

levels of revenue, expenditure, assets, liabilities, and net worth. 

Royalty Fee 

Also referred to as the “management service fee”, these fees are the continuous payments the 

franchisee gives the franchisor to stay part of the franchise system. 

Supplier 

A supplier is the authorized individual or company who has been approved by the franchisor, to supply 

products or services to the franchisee. 

Territory 

Territory is defined as a specific area in which the franchisee has the exclusive right to conduct business, 

without the threat of competition from fellow franchisees. 

Trademark 

A franchise trademark is a form of identification such as a brand name or logo, which is associated with 

the franchise.

Franchise Direct's Pocket Guide to Franchising

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