Owning any franchise means you’re helping expand an already successful business. But in order to hitch a ride on someone else’s success, you need to pay an entrance fee, and if you want to make money off of that business, you have to put in some work and share your winnings, i.e., pay royalties. You’re essentially buying into an established brand and organization in order to open a new location managed by you. You have to follow a certain set of rules, procedures, and plans, although you can also add innovations to the franchise.
Sometimes a company wants to expand into new territory or markets but might not have the knowledge or capital to do it without help. Franchising offers a way for business owners to expand with help from people who know the local market better, and a way for others to join an already successful business model. If you want to open a new location on behalf of a franchise, you need to first prove you can cover the cost, along with paying the fees or rights to use the brand. You are not a co-owner of the company, you only acquire the right to use the business model, and must follow a certain set of rules, procedures, and plans, although you can also add innovations to the franchise.
The owner of the brand or franchise that you will be participating in.
The person who opens one or several new locations of the franchise on behalf o the franchisor.
It is simply when a single franchisee is in charge of a single location. Usually, but not always, the franchisee is also the manager of the location and is in direct contact with the franchisor. It is the most common way of operating a franchise location in the United States.
This happens when a franchisee operates more than one location and thus has to hire more staff to operate each one. Sometimes, the franchisor will require the franchisee to still be the overall regional manager and keep an eye on each location, but this is not always the case.
Similar to a multi-unit franchise, a master franchise is when the franchisor hands over almost all control in a region to a single franchisee, basically becoming a representative of the franchise in a specific territory.
You can’t start a path on the franchise road without knowing some basic terms like:
- Franchise fee: The amount a potential franchisee pays to have the rights to a franchise location.
- Franchise royalty: A percentage of the monthly revenue a franchisee pays to the franchisor.
- Net-worth: What the franchisee must be worth in order to qualify for a specific franchise
- Liquid Capital: The cash-on-hand a potential franchisee has to have before being considered for a franchise. This will help determine if the candidate can cover all the costs of opening a new franchise location.
- Franchise cost: The entire cost of opening a new franchise, which includes the fee, first royalties, capital, cost of training, marketing, equipment, and more.
A franchise has a lot of advantages over starting your own business, especially when it comes to the established brand you’re joining, the know how, the standardized procedures, a brand customers trust, and other factors. But it can be just as much an investment as starting up your own business, although most franchises, in the end, can cost a bit less. One disadvantage of owning a franchise is that you might find it hard to follow the rules of a franchise and not be able to innovate by yourself, although following a previously successful model is part of the reason why many decide to join a franchise in the first place, and it’s overall less risky for you and the franchisor’s finances. Also, you are obligated to follow a contract and manage the franchise for a minimum amount of years, even if you are struggling financially with it, so it will be hard to end the franchise experiment before your contract expires.
This is when an already existing and successful independent business is converted into a franchise. A successful local coffee shop, for example, might decide to join an existing franchise if it thinks it will improve its sales even more, and a franchise might decide to buy the independent business because it sees it as an opportunity to enter a new market.
A franchise fee is what you pay to get into a successful franchise business. When getting into the tree service franchise, you’ll have to pay a fee to any franchisor. For a tree service franchise, the range is from $30,000 to $50,000. This does not include other costs when launching a franchise, like materials, labor, training, etc.
Once you paid a fee to have the rights to a tree service franchise and be part of the brand, you still have to pay royalties to the franchise, mostly on a monthly basis. How much you pay depends on the franchise, but they typically range from 4% to 12% of your monthly revenue. The industry you’re in also determines the fee.
This refers to the capital (money) you need in order to open a franchise location. It might include the loans you can take out to fund the location, the financial partners you have managed to get, etc. Even your credit score is taken into account. The franchisor needs proof you can successfully open a new location.
The cash-on-hand a potential franchisee has to have before being considered for a franchise. This will help determine if the candidate can cover all the costs of opening a new franchise location.
It is another way for a franchisor to decide if they are going to go into business with you. Your properties, your liquidity, stocks, etc. On average, your net worth must be of around $350,000 for a tree service franchise.
Any type of franchise can be approved by the Small Business Administration (SBA), and tree service franchises are no exception. Several tree services franchises are listed as SBA approved, including Monster Tree Services. Being SBA approved means you can qualify for a loan from the SBA when looking to join that franchise.
It is the basic contract between a future franchisee and the franchisor. It needs to be handed over at least seven days before signing it so that the franchisee can have time to have it reviewed by a franchise lawyer or just themselves.
This refers to the law that gives the Federal Trade Commission the power to regulate the franchise industry in the United States. It is actually a set of requirements and rules that franchisees must follow so as to make sure the industry is fair and competitive. It also requires franchisors to make honest and complete reports about their franchises available to their prospective franchisees. These reports are called FDDs.
The Franchise Disclosure Agreement (FDD) is a document that all franchisors must have and provide to prospective franchisees that want to make an informed decision about their new investment. It’s handed over to the potential franchisees at least 14 days before signing any franchise agreement (which also has to be handed over seven days before signing it). It has to be understandable, written in plain English, and with the terms and rights clearly laid out.
Everything from franchise fees, franchise royalties, to the territory and even financial performance representations (FPR) of current franchise locations must be there.
The FDD also has the phone numbers and contact info for all of the franchisees, so you can call them up and ask them for objective information about the brand.
First, ask for the FDD report, so you can know the basic information about the franchise’s growth, financial performance, how much does it cost to buy into the franchise (the franchise fee), how much does the franchisor take from your monthly revenues (the franchise royalties), how much do you need to start, your net worth, what do you need to know about the industry the franchise is in, what skills do you need, how much can you expect to make in the first months, the health of the other franchise locations, and even ask for the information of other franchisees so you can ask them for their perspective on the company.
Ask them if they have: enough liquid capital to cover the cost of setting up a new location; enough net worth for any future investment or in case of emergency; any experience they might have in managing a small business; partners that might help them cover the cost; what are their personal goals for managing a business; their reasons for wanting to buy a franchise; if they are willing to be patient when it comes to expecting a return on investment; if they will follow the rules and procedures laid out by you.
A franchise agreement can last for several years, depending on the franchise system itself. They can last for as short as one year, two or 5 years, and some can even go for as long as 20 years, or anything in between, although the most common agreements last for just 5, with the option to renew.
There are no federal licenses or requirement to register as a franchisee, and the only requirement is to comply with the Franchise Rules and the FDD at the moment of buying into the franchise. Some states, like California, Hawaii, Illinois, New York, and other require the franchisor to go through the legal process of obtaining a license for you, although you still have to go through the rest of the typical paperwork of opening a new business. It all depends on the state, the city, the industry you’re in, and maybe even the state the franchisor is from. You will need to go over this with your franchisor and your franchise lawyer.
Yes, you can, although this is completely up to the franchise itself. The investment will be equivalent to buying all the current locations the franchise has, plus the overall cost of the entire brand, system, assets, and profit.
First and foremost, get legal help and consult. Geta franchise lawyer that will help you go through your local, state and federal regulations in regards to franchises. Like we mentioned before, get every bit of information your can about the franchise’s financial health, performance, locations, goals, support, and even legal history to check for trouble. You need to make sure that you will have the legal support of a franchisor in case any problems with the franchise itself arises.
Go through some these points with your lawyer:
- Long term contracts and how to get out of them in varying cases of emergency.
- Have an exit plan, and the possibility of selling your franchise location at some point, even if you don’t plan on it. You don’t want to get stuck with a franchise you no longer want.
- Make sure you know the territory you’re getting. You don’t want to be promised a very general territory only to find out there’s a clause that permits two or three more franchise locations just on the border of your territory.
- Never stop learning about the changes to your state’s franchise laws and regulations. Always stay on top of everything.