Frequently Asked Questions

Q:What is franchising?
A:Franchising generally describes a relationship between two parties to distribute goods and/or services. Within the U.S., there are two primary types of franchise systems: product or trade name franchising and business-format franchising.

In a nutshell, product or trade name franchising involves a manufacturer granting another party a license to sell their goods. Examples include cars sold through auto dealerships, gas sold through service or convenience stations and soda sold through local bottlers. Under a business-format franchising relationship, a business (franchisor) allows another party (franchisee) to market their products or services using their business name and trademark, and prescribed business format. In return for using the franchisor’s name and system, the franchisee pays all business expenses related to start up and operation, as well as a royalty (usually a percentage of sales) to the franchisor. Examples of business-format franchises include McDonald’s, AAMCO Transmission and Molly Maid.

Another adaptation of business-format franchising is conversion franchising which brings independent business people together as a collective power under a common, recognizable name/brand using national advertising. Century 21 is a successful example of conversion franchising.


Q:What is a franchise agreement?
A:Federal laws, and many state laws, mandate that every franchise company provide prospective franchisees with a detailed outline of the terms governing how the franchisor and franchisee will conduct business together. This document is referred to as the franchise agreement. The agreement is designed to provide a franchisee with detailed information regarding the standards of operation and what is required of them. For the franchisor, the document assists them in ensuring system-wide uniformity of their franchise. While the document may seem overwhelming to many, it is essential to the process of making an informed franchise decision.

A prospective franchisee receives the franchise agreement at the same time as the offering circular. The agreement should be reviewed by your attorney. The franchise agreement covers a multitude of issues including:
  • Terms – length of the agreement, i.e. five years, twenty years, perpetuity?
  • Maintenance and repair – the responsibility of franchisees to make specific repairs and upgrades to maintain their units.
  • Insurance – specific types of insurance the franchisees are expected to carry, i.e. general liability, property insurance and workers’ compensation.
  • Acknowledgement of receipt of documents – FTC rules require that a prospective franchise be presented with the offering circular 10 days prior to the execution of a franchise agreement or payment of any monies. The completed franchise agreement is required five business days prior to acceptance.

Q:Why purchase a franchise?
A:One aspect of the American dream for many is owning their own business. A franchise provides an excellent opportunity for many to achieve this dream. Buying a franchise means that you can now launch a new business without having to deal with the usual start-up roller coaster ride. Thanks to someone else, they have already made and corrected the largest possible mistakes one makes in starting a new business. They have smoothed out the bumps in the road, so to speak, while creating a system that works and works well.

An added bonus is the level of comfort that most franchisees will benefit from in terms of ongoing support services offered by the franchisor. The collective purchasing power and advertising programs also make a huge difference.

Remember, you are not alone when you become part of a franchise system. Others have, and are, traveling the same path as you and are willing to share their knowledge and experience with you.

Q:What is a UFOC?
A:UFOC is the abbreviation used for Uniform Franchise Offering Circular. This legal document is required by the franchisor and is designed to furnish prospective franchisees with very specific and vital information about the franchisor, the business and the terms of the franchise relationship. FTC Rules dictate the format of the UFOC disclosure statement, so there is uniformity in the information disclosed from one franchisor to the next.

Q:How BIG is Franchising?
A:Huge! It may surprise you to know that most analysts estimated that franchising companies and their franchisees accounted for $1 trillion in annual retail sales from 30,000 franchised small businesses in 75 industries in 2000. Furthermore, franchising accounted for more than 40 percent of ALL U.S. retail sales.

Experts estimate that franchising:
  • employs more than 8 million people,
  • opens a new unit somewhere in the U.S. every 8 minutes, and
  • results in 1 out of every 12 retail establishments being a franchised business.

Q:How Can I Be Sure I Won’t Lose Money?
A:Unfortunately, like most things in life, nothing is guaranteed. If someone approaches you with a franchise deal guaranteeing a certain profit or level of success, RUN! If it sounds too good to be true, chances are it probably is. Investigate all offers and earning claims thoroughly.

In the case of investing in a franchise, no one can be 100 percent sure that you won’t possibly lose money. With that said, it is important to note that the majority of franchisees are successful, satisfied business people. They will be the first to tell you it took a lot of hard work and that success or failure ultimately laid with themselves, as it will with you.

Q:What accounts for the high success rate among franchised businesses?
A:The franchising system is designed to foster the operation of a successful business. Potential business missteps have been carefully worked out of the system over time. Furthermore, if the franchisee encounters a new challenge, the franchisor is there to lend support and guidance.

According to the SBA, most businesses fail from a lack of management skills. With an experienced franchisor with a proven track record standing in your corner, you have improved your chances of succeeding ten-fold.