Franchising-Buying a Franchise

Buying A Franchise

Buying a Franchise

An important step in the small business startup process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision; because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

One of the biggest mistakes you can make is to hurry into business, so it's important to understand your reasons for going into business, and determine if owning a business is right for you.

If you are concerned about the risk involved in a new independent business venture, then franchising may be the best business option for you. But remember that hard work, dedication, and sacrifice are essential to the success of any business venture, including franchising.

What is Franchising?

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards.

Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the

entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:

    * Product/trade name franchising and
    * Business format franchising.

In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are not interested in.

Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When you attend, comparison shop for the opportunity that best suits your needs and ask questions.

Know How Much You Can Invest

An exhibitor may tell you how much you can afford to invest or that you can't afford to pass up this opportunity. Before beginning to explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.

Know What Type of Business is Right for You

An exhibitor may attempt to convince you that an opportunity is perfect for you. Only you can make that determination. Consider the industry that interests you before selecting a specific franchise system. Ask yourself the following questions:

    * Have you considered working in that industry before?
    * Can you see yourself engaged in that line of work for the next twenty years?

Do you have the necessary background or skills?

If the industry does not appeal to you or you are not suited to work in that industry, do not allow an exhibitor to convince you otherwise. Spend your time focusing on those industries that offer a more realistic opportunity.

Comparison Shop

Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitors' presentations and discussions with other interested consumers. Get answers to the following questions:

    * How long has the franchiser been in business?
    * How many franchised outlets currently exist?
    * Where are they located?
    * How much is the initial franchise fee and any additional startup costs? Are there any continuing royalty payments? How much?
    * What management, technical, and ongoing assistance does the franchiser offer?
    * What controls does the franchiser impose?

Exhibitors may offer you prizes, free samples, or free dinners if you attend a promotional meeting later that day or over the next week to discuss the franchise in greater detail. Do not feel compelled to attend; rather, consider these meetings as one way to acquire more information and ask additional questions. Be prepared to walk away from any promotion if the franchise does not suit your needs.

Get Substantiation for Any Earnings Representations

Some franchisers may tell you how much you can earn if you invest in their franchise system or how current franchisees in their system are performing. Be careful. The FTC requires that franchisers who make such claims provide you with written substantiation. This is explained in more detail in the section "Investigating Franchise Offers." Make sure you ask for and obtain written substantiation for any income projections or income or profit claims. If the franchiser does not have the required substantiation or refuses to provide it to you, consider its claims to be suspect.

Take Notes

It may be difficult to remember each franchise exhibit. Bring a pad and pen to take notes. Get promotional literature that you can review. Take the exhibitors' business cards so you can contact them later with any additional questions.

Avoid High Pressure Sales Tactics

You may be told that the franchiser's offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price. Do not feel pressured to make any commitment. Legitimate franchisers expect you to comparison shop and investigate their offering. A good deal today should be available tomorrow.

Study the Franchiser's Offering

Do not sign any contract or make any payment until you have the opportunity to investigate the franchiser's offering thoroughly. As will be explained further in the next section, the FTC's Franchise Rule requires the franchiser to provide you with a disclosure document containing important information about the franchise system. Study the disclosure document. Take time to speak with current and former franchisees about their experiences. As investing in a franchise can entail a significant commitment, you should have an attorney review the disclosure document and franchise contract and have an accountant review the company's financial disclosures.

Before Selecting a Franchise System

Before investing in a particular franchise system, carefully consider how much money you have to invest, your abilities, and your goals. The following checklist may help you make your decision.

Your Investment

    * How much money do you have to invest?
    * How much money can you afford to lose?
    * Will you purchase the franchise by yourself or with partners?
    * Will you need financing and, if so, where can you obtain it?
    * Do you have a favorable credit rating?
    * Do you have savings or additional income to live on while starting your franchise?

Your Abilities

    * Does the franchise require technical experience or relevant education, such as auto repair, home and office decorating, or tax preparation?
    * What skills do you have? Do you have computer, bookkeeping, or other technical skills?
    * What specialized knowledge or talents can you bring to a business?
    * Have you ever owned or managed a business?

Your Goals

    * What are your goals?
    * Do you require a specific level of annual income?
    * Are you interested in pursuing a particular field?
    * Are you interested in retail sales or performing a service?
    * How many hours are you willing to work?
    * Do you want to operate the business yourself or hire a manager?
    * Will franchise ownership be your primary source of income or will it supplement your current income?
    * Would you be happy operating the business for the next 20 years?
    * Would you like to own several outlets or only one?

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