A franchise is a business model that involves one business owner (franchisor) licensing trademarks and methods to an independent business owner (franchisee). In exchange for the right to use the franchisor’s name and benefit from the franchisor’s assistance, the franchisee is required to pay some fees, including initial franchise fee, continuing royalty payments, advertising fees, and other possible costs. To ensure uniformity, franchisors usually exercise wide scope of control over the ways that franchisees conduct franchise business, including site selection, operation methods, business design or appearance, restriction on the sources of ingredients, restriction on sale areas, and etc.
To decide whether an individual is suitable for running a franchise business, the factors of consideration include the following, for examples,
- Investment: e.g., how much money do you plan to invest;
- Investors abilities and experiences: does franchisor require prospective franchisee to have certain type of skills or experience?
Before any person invests in any franchise, be sure to get a copy of the franchisor’s Franchise Disclosure Document (FDD). FDD includes 23 items, including franchisor’s background, business background, litigation history, bankruptcy, initial and ongoing costs, suppliers, territory and customer restrictions, current and former franchisees, and etc. Under the Franchise Rule enforced by the FTC, franchisor must provide prospective franchisee the document at least 14 days before prospective franchisee is asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. The prospective franchisee have the right to ask for and get a copy of the FDD once the franchisor has received his application and agreed to consider it.
Franchise business is a good way for new coming foreign investors to get familiar with new investment environment within the shortest period of time and acquire a success more quickly with a lower risk of losses.