Restaurant franchising is a way of getting into the restaurant business without having to do everything from scratch. There are at least two levels of people involved in the franchise system. These two are the franchisor, who lends his business system or trade name; and he franchisee, who often pays an initial fee and sometimes a royalty for the right to use the name and business system of the franchisor.
How does a franchisor make money?
Typically, a franchisor sells the right to a franchise for an initial flat fee called the "franchise fee". This fee is in addition to the actual costs associated with opening a franchise unit in one's local market. Then, the franchisor will often receive ongoing payments, such as royalty fees, taken as a percentage of sales. Many franchisors will also sell supplies and/or services to their franchises.
How widespread is franchising?
In 2000, sales by franchises accounted for more than 40 percent of sales by all U.S. businesses. Analysts estimated that last year, franchises accounted for more than $1 trillion in annual U.S. retail sales and that there were 320,000 franchised small businesses in 75 industries. Industry analysts estimated that franchising employs more than 8 million people and that a new franchise opens up every 8 minutes somewhere in the U.S. Also, approximately 1 out of every 12 retail businesses is a franchised business. (Statistics provided by the International Franchise Association)
What should you consider before buying a franchise? The IFA recommends that you consider and investigate the following before buying a franchise:
1. The level of experience required to own and to operate the business.
2. A complete understanding of the business you plan to buy.
3. The hours and personal commitment you will have to give in order to run the business.
4. Learn as much as you can about the franchisor, the company's past successes/failures, and the business structure.
5. How are other franchisees doing?
6. How much will you have to pay to open up your franchise?
7. Will there be continuous fees or royalties?
8. Will you have to buy any products or services from the franchisors?
9. Learn the terms and conditions under which the contract can be renewed or terminated.
10. Check out the financial condition of the franchisor and its system.
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