Section 1: Starting a Small Business

Franchises

The idea of franchising originated with automobile agencies and then spread to service stations, fast-food restaurants, and motels. A franchise is an exclusive right to sell a product or a service in a certain location. The company that grants a franchise is called the franchiser, and the person who owns the business is called the franchisee.

You probably see these types of businesses every day. Subway, KFC, and Holiday Inn are names most people recognize and are able to associate with a particular product or service. This association is what franchising is all about. The franchiser of Dairy Queen in effect says, "My name is known to people all over the country for the ice cream and food I serve in my establishment. Just having my name on a restaurant is enough to attract many customers. I'll let certain individuals, who want to operate their own business, use my name. However, they must pay me a fee for the use of it, and they have to abide by the rules I have set up because I have to protect my reputation."

Have you ever noticed how similar most of the McDonald's Restaurant premises and their products are? Usually a franchiser establishes strict rules that govern the following:

the type and characteristics of the building the franchisee occupies
the nature and quality of the products sold
the quality and expertise of service offered

When individuals apply for a franchise, they need to furnish a great deal of information about themselves, including details about any previous business experience they may have. Furthermore, they also need to provide information about their financial position, and supply references to vouch for their character and reliability. Once the information about the potential franchisee has been verified and approved, both parties will sign a contract. This written agreement obliges the franchisee to pay a fee (sometimes called a royalty) to the franchiser. Other elements of the contract include identifying what obligations will be undertaken by both parties to get the business started and to maintain a successful operation.