Franchising

Franchising 101: Common terms explained

Bryan and Andrea McGinness are CEO and COO of WineStyles Tasting Station and write quarterly about the world of franchising for IowaBiz.com.

If you’re new to the world of franchising, all of the industry terminology probably sounds like a foreign language to you. That was the case for us when we first decided to join the nation’s largest wine and craft beer boutique franchise. We recently shared some top items to consider before becoming a franchisee and thought it would be beneficial to go over some of the key industry terms for those who may be exploring the idea of franchise ownership.  

Franchisor

A franchisor is the company that grants the franchisee the right to use its business model and brand under the terms of the franchise agreement.

Franchisee

A franchisee is a person or group that obtains the rights from the franchisor to do business under the franchisor’s trademark or business name. 

Area Developer

In essence, an area developer is a “mini-franchisor.” This is a special relationship where the developer can recruit and train other franchisees who open units in their territory. They can act as mentors to new franchise owners and assist them with building their own successful franchise business. The developer would receive a percentage of the franchise fee for each new unit sold, as well as a percentage of the ongoing royalty stream. Every franchisor sets the terms for these types of relationships, which can vary contractually.

Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is a legal document that outlines the franchisee’s obligations to the franchisor and the costs and fees associated with committing to a franchise system, as well as the company’s history and other contractual obligations. The U.S. Federal Trade Commission requires all franchisors to provide this document to prospective franchisees during the pre-sales process. Reading the FDD is an essential step in the evaluation process, and we highly suggest studying the entire document before signing on the dotted line.

Initial Investment

Located on line item 7 on any FDD, the franchisor will provide an overview of the initial costs associated with the opening of its particular franchise. It is important to note that these costs will vary greatly depending on a number of variables, such as the industry, brand and the specific location where the business will operate.

Royalty and Marketing Fees

Costs and fees associated with being a franchisee of any system include paying ongoing royalty and national marketing fees to the franchisor. These fees give franchise owners the privilege of using the franchisor’s brand and are typically based on a percentage of the franchisee’s gross sales. In addition, franchisees benefit from access to marketing plans, business strategies and ongoing operational training and support.

Profit & Loss (P&L) Statement

A P&L statement predicts the amount of profit or loss a business can expect to generate over a period of time. This document is beneficial for monitoring the business and identifying areas where it is thriving and where it may be failing.

As you do your franchise research, remember to keep this cheat sheet of common franchise terms handy. You can thank us later. 

Cheers!

Things to consider before becoming a franchisee

- Bryan and Andrea McGinness are CEO and COO of WineStyles Tasting Station and write quarterly about the world of franchising for IowaBiz.com.

As an entrepreneur considering investing in a franchise, it’s important to ask the right questions before investing in a long-term relationship with a franchiser. As the largest private wine and craft beer retail franchise in the country, we wanted to share some of the most common questions we’ve received from entrepreneurs and some of our current franchisees over the years.

What is franchising?

According to the International Franchise Association, franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. 

What is a proven system, and why is it so important?

When joining a franchise, a prospective franchisee should look for a brand with a proven business model. What does this mean, exactly? Well, what systems does the company have in place to ensure your franchised location will be profitable? Most companies offer support in areas such as marketing, training, real estate and operations, to name a few. When you sign a franchise agreement, you are buying the rights to replicate a business model. This includes the rights to using the product, signage, logos, uniforms, advertising and marketing. As part of a franchise brand, opportunities for originality are limited, so it’s imperative that the franchise you partner with offers a business plan with adequate training and ongoing support. Successful franchise owners want the opportunity to be in business for themselves, while still being part of a well-established company.

How much will it cost?

Costs of opening a franchise vary greatly by industry segment and can range anywhere from $50,000 to $5 million. Franchise brands require new owners to pay a “franchise fee” — an initial fee when the franchise agreement is signed, which can vary from brand to brand. The fee may cover the cost of training and support, assistance with site selection, etc. Franchisees will also pay an “initial investment” cost, which can vary based on brand and industry. These startup costs typically include construction and build-out, equipment, fixtures, inventory, working capital to open and operate a location, as well as grand opening advertising. Royalties and other fees, like a national marketing fund, should also be considered before establishing a long-term relationship with a franchiser.

Should I speak to current franchisees?

Before committing to one particular business, we suggest doing your homework and vetting current franchisees to learn more about their franchising experience. Consider asking them questions about the initial training and ongoing support they received. You can also ask about their relationship with the franchiser and their expectations for annual revenues when they first signed on. Validation is part of the due diligence process and will give you a greater perception of the business from an owner perspective.

How long is my commitment?

Most franchise agreements come within an initial term between 10 and 20 years. It’s important to make sure that this fits into both your personal and professional long-term goals and you consider the location of your franchise before signing the dotted line.

As you continue researching and evaluating each franchise opportunity on your list, additional questions will arise. The International Franchise Association is a great organization and resource for prospective franchise buyers. To learn more, check out www.franchise.org/franchising-101.

Welcome to the world of franchising

- Bryan and Andrea McGinness are CEO and COO of WineStyles Tasting Station and write quarterly about the world of franchising for IowaBiz.com.

Have you ever considered owning your own business but feel overwhelmed and not sure where to start? If so, you’re not alone and you’ve come to the right place. Hello and welcome to the world of franchising – where you can go into business for yourself, but not by yourself.

My name is Andrea McGinness, and my husband Bryan and I own a franchise concept called WineStyles Tasting Station. We have more than 20 locations in the U.S. and our company is based in West Des Moines, just a few miles away from our house. We are very excited to be new IowaBiz bloggers and look forward to sharing our business experiences and educating readers on the world of franchising.

For our first post, we’d like to focus on the recent 2016 growth report from the International Franchise Association (IFA). The IFA is the oldest and largest group representing franchising worldwide. They work to protect, promote and enhance franchising. We’re very proud to be part of and support such a wonderful organization.

The IFA recently released its 2016 Franchise Business Economic Outlook. The report found that franchise small businesses will once again grow at rates that exceed non-franchise business growth. Here are a few of the key findings:      

  • Franchise businesses will have a 3.1 percent growth in jobs, adding 278,000 direct jobs to the economy this year for a total of 9.1 million.  
  • The number of establishments will grow this year by 13,359, or 1.7 percent, to 795,932.
  • The gross domestic product (GDP) of the franchise sector will increase by 5.6 percent to $552 billion in 2016. To put this impressive growth into perspective: This will exceed the growth of U.S. GDP in nominal dollars, which is projected at 4.4 percent.

Franchising encourages entrepreneurship and allows first-time business owners to tap into their entrepreneurial spirit and become a part of a proven business model. As a franchisor, a strong growth forecast is good news. And let’s not forget that franchise businesses are leading to more jobs in local communities nationwide.

The beauty of franchising is that you can start small with one location. That’s what we did. First we were a WineStyles franchisee before deciding to purchase the enterprise in 2012. We have always been passionate about the company, so we were thrilled when we were presented with the opportunity to own the concept.

There’s nothing better than helping other entrepreneurs turn their passion into a full-time gig. There are over 300 franchise business formats to choose from, whether you love pets, cars or travel. As wine lovers and foodies, you can understand why we chose this path.

Thank you for reading our first blog. We can’t wait to share more stories and industry insights with our fellow Iowans.

Cheers!

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