Buy 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.

To learn more about:

• The advantages and disadvantages of franchising
• The franchiser's responsibilities
• What is contained in a franchise packet
• Understanding the franchise contract

Read:

• "Buying A Franchise - A Consumer Guide" (PDF) - Federal Trade Commission (FTC): When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: there’s no guarantee of success. The Federal Trade Commission, the nation’s consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.
• "Is Franchising for Me?" (PDF) - Small Business Administration's (SBA's) Workbook - Deciding whether or not to go into business is a very important step in the business start-up process for new and potential small business owners. Each year, thousands of entrepreneurs and potential entrepreneurs are faced with this difficult decision. Because of the risk and the amount of work involved in starting a new business, many new and potential small business owners choose franchising as an alternative to starting a new, independent business.
• Franchise Registry - The Franchise Registry lists names of franchise systems whose franchisees enjoy the benefits of a streamlined review process for U.S. Small Business Administration (SBA) financings. Loan applications for franchises on the Franchise Registry can be reviewed and processed more efficiently and quickly by SBA and its lenders because the respective franchise agreements do not need to be reviewed in each individual franchisee situation.
• Franchise Directories & Evaluation - Online Training, Franchise Opportunity Evaluation, Franchise Fraud, Information for Buyers, Information for Sellers, Related Resources.

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.

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.

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?

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.

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?

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.

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.

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.

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.

How can I go about investigating a particular franchise that I am interested in?

• Request an information packet from the franchiser.
• Interview owners of current franchises.
• Research the industry and other franchises in this industry.
• Seek expert advice to better understand the franchise agreement.
• Review costs related to getting into this franchise and compare them to the costs of starting a nonfranchised business in this industry.

Within the same industry, why does it cost so much more to get into some franchises than it does others?

• The more expensive franchises are better known in the marketplace, therefore they can command a higher price (oftentimes you are buying into the value of a well-known name). The less expensive franchises may not have any name recognition and are therefore looking to expand their presence in the market by offering their franchises at a much lower price.
• The more expensive franchises probably have proven formulas for success, which means your investment risk factor will be lower than it would be for a less proven franchise system.
• Also, you will find that those more established franchises that have experienced a long history of advertising and promotion of their products have, in turn, created a higher level of demand for their products, which results in a premium price for their franchise.

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.

Investigating Franchise Offerings

Before investing in any franchise system, be sure to get a copy of the franchiser's disclosure document. Sometimes this document is called a Franchise Offering Circular. Under the FTC's Franchise Rule, you must receive the document at least 10 business days before you are asked to sign any contract or pay any money to the franchiser. You should read the entire disclosure document; make sure you understand all of the provisions. The following outline will help you to understand key provisions of typical disclosure document as well as ask questions about the disclosures. Get a clarification or answer to your concerns before you invest.

• Business Background
• Litigation History
• Bankruptcy
• Costs
• Restrictions
• Terminations
• Training and Other Assistance
• Advertising
• Current and Former Franchisees
• Earnings Potential
• Financial History

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