LO 5.1  Explain what a franchise is and how it operates.

Franchising is a legal agreement that allows a franchisee to use a product, service, or method of the franchisor in exchange for fees and royalties. A franchisee is an independent businessperson who agrees to operate under the policies and procedures set up by the franchisor.

LO 5.2  Compare the advantages and disadvantages of franchising.

There are eight major advantages of franchising from the franchisee’s perspective: proven product or service, marketing expertise, financial assistance, technical and managerial assistance, opportunity to learn, quality control standards, efficiency, and opportunity for growth. The primary disadvantages to the franchisee include fees, restrictions on his or her freedom to operate the business, overdependence on the franchisor, unsatisfied expectations of the franchisor, termination of the agreement, and poor performance of other franchisees.

LO 5.3   Explain how to evaluate a potential franchise opportunity.

To evaluate a franchise opportunity, you should send for a copy of the company’s disclosure statement (the company is required to send it to you), research the company through business periodicals, talk to current and former franchisees, and check out the franchisor’s reputation with the International Franchise Association.