Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs. Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources.
A broker also may help you finish applications and the paperwork to complete the sale. Brokers often work for franchisors, and are paid only if a sale is made. That may be true — or not. Ask how many franchisors the broker represents.
A broker who represents only a few franchisors will give you limited suggestions. Some franchise brokers may claim they will suggest only those franchises that meet certain standards.
You may think this means that your risk is limited because the broker weeds out poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned down. Some brokers earn a flat fee regardless of the price of the franchise they sell. Others earn a commission based on the cost of the franchise.
These brokers may steer you toward a more costly franchise to increase their commission. Ask who pays the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission.
To convince you to buy a particular franchise, a broker may talk about how much money you can make. These claims may not be true or can be misleading. Or the claim may be based on outdated industry data.
In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far less. Talk to them, rather than relying on information from the broker alone. Ask about their experience with the franchisor. Purchasing a franchise is like any other investment: it comes with risk. Is it seasonal or evergreen? Could you be dealing with a fad?
Does the product or service generate repeat business? How many franchised and company-owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog?
How many competing companies, including competing franchises, sell similar products or services at a similar price? Are those companies well established or widely recognized in your community? Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off? An established franchise with a well-known name — and good reputation — is more likely to draw customers than a relatively new or unknown franchise.
What training and continuing support does the franchisor provide? Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field?
Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience or training similar? What do current franchise owners say about the quality and usefulness of the training they received? Many franchisors that operate well-established companies have years of experience selling goods or services and managing a franchise system. Some franchisors started by operating their own business.
Find out how long the franchisor has managed a franchise system. Does the franchisor have enough expertise to make you feel comfortable? If the franchisor has little experience managing a chain of franchises, take promises about guidance, training and other support with the proverbial grain of salt. In fact, a franchisor that grows too quickly may not be able to support its franchisees with the services it promises them.
Are they sufficient to support you and all the other new outlets the franchisor plans to open? Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor.
You have the right to ask for — and get — a copy of the FDD once the franchisor has received your application and agreed to consider it.
The franchisor may give you a copy of its FDD on paper, via email, through a web page or on a disc. The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you, and keep a copy for reference. Here are some key sections of the FDD:. Item 1 tells you how long the franchisor has been in business and its likely competition. It also lets you know if there any legal requirements unique to the franchised business, like a requirement that you get a special license or permit.
This will help you understand the costs and risks you will take on if you purchase and operate the franchise. Item 2 identifies the executives of the franchise system and describes their experience. Item 3 lists important information about prior litigation — whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct.
This item will tell you whether the franchisor or any of its executives have been held liable for — or settled civil actions involving — the franchise relationship. If there have been many claims against the franchisor, it may mean the franchisor has not performed according to its agreements. Or it could show that franchisees are dissatisfied with its performance. Item 3 also should say whether the franchisor has sued any of its franchisees during the last year.
In some respects, no. You still have to answer to someone else and follow his or her direction. You don't really own the business; you own the assets you've purchased in order to establish the business. This comes out to about 3. The biggest advantage of franchising appears to be the reduction of risk you will be taking for your investment. This is because franchises typically get up and running faster, and are profitable more quickly. This can be a result of better management as well as a well-known name.
It is in this area that the franchising option shines the most. When you lease a franchise, you are leasing that managerial know-how. You also usually get better deals on supplies because the franchise company can purchase goods and supplies in bulk for the entire chain, and then pass that savings on to you and the other franchise units.
The often- instant recognition from customers is also a big plus. Customers are dealing with a "known" rather than an "unknown.
For the customer, the advantages of a franchise include the comfort of knowing what you're getting. You know that the quality of the product or service at one location will be comparable to that of another location.
You know what they have and you already know what you like about it. The questions for you as a potential franchisee are: Are you looking for something that is uniquely yours? Or do you simply want to run the show, regardless if it's by someone else's rules? Before you answer those questions, let's go into a little more detail about how the franchise actually works. There are two groups involved in a franchise, the franchisor the person or company leasing the rights to the business name and system and the franchisee the person who purchases it.
The right to the franchise is sold by the franchisor to the franchisee for an initial sum of money, often called the up-front entry fee, or franchise fee. This money will be paid once the contract has been signed. The contract franchise agreement details the responsibilities of both the franchisor and the franchisee, and is usually for a specific length of time typically several years. Once the contract expires, it must be renewed. State laws often have an impact on the options for this renewal.
This initial franchise fee doesn't include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assistance like site selection. It doesn't include any of the necessary inventory, fixtures, furniture or real estate. In addition to the franchise fee, the franchisee must pay the franchisor royalty fees , or other on-going payments. These payments are usually taken as a percentage of sales, but can also be set up as a fixed amount or on a sliding scale.
The terms of these fees will be spelled out in the franchise agreement. These payments are for the on-going services and support that the franchisor provides. Franchisors may also sell supplies directly to their franchisees. Advertising funds are also paid periodically. These funds are usually put into a general account and used for national and regional promotion for the entire chain.
The success of most franchises is based on the operating systems, methods, and products produced. For this reason, franchisors must protect their proprietary information and trade marks. In order to do this, they establish restrictive covenants for their franchisees. These covenants govern the things a franchisee can do. For example, one restrictive covenant may state that the franchisee cannot operate another similar business that would compete with the franchised business during the term of the franchise agreement.
These are called in-term non-competition covenants. There may also be post-term non-competition covenants that prohibit the franchisee from operating a similar business even after the terms of the franchise have expired. Each state, however, has its own laws regarding the enforcement of non-competition covenants.
Often, in-term covenants can be more readily enforced than post-term covenants. A business's trade secrets are often vital to its success. It is an understood rule that franchisees will keep trade secrets strictly confidential. This not only protects the franchise, but it also protects the franchisee's individual investment. Most states have adopted some version of the Uniform Trade Secrets Act , which helps identify the parts of the franchise system that may constitute a trade secret.
To see a list of those states that have adopted it, U. Trade Secret Protection by State. Proprietary systems and franchise information that doesn't fall under the category of a "trade secret" should be treated as such regardless, because it may still be protected under the restrictive covenants of the franchise agreement. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 2 to 10 percent, or a monthly figure.
If you rent a building, you'll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, you'll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee. Most franchisors will tell you what their estimated leasehold improvements will be.
Equipment Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.
Signs Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase. Opening Inventory This will usually consist of at least a two-week supply, unless you're in a business that requires a much more complicated inventory.
Most franchisors will tell you what their opening inventory requirements are. Working Capital For rent, you may be required to deposit first and last months' payments as well as a security fee.
You'll also have to pay a deposit to the electric, gas and telephone companies who will want deposits prior to giving you service.
You'll need some working capital and money in the cash drawer to make change. You'll need money to pay your employees. You'll need money just to operate until there's a cash flow. If you're buying a franchise that relies on charge accounts, you're going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you. Advertising Fees There is usually a fee for advertising on a regional or national basis.
Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.
An important protection for the person planning to buy a franchise is the FTC's Franchise Rule, put into effect October 21, The rule requires covered franchisors to supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest.
This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money.
Franchisors do not have to renew an agreement at the end of the franchise term. Also consider You might consider buying an existing business if buying a franchise does not seem right for you. Read about how to start a home business. Previous Buying a franchise Next Choosing the right franchise. Last reviewed: 18 Jul Last updated: 14 Sep Print Page Print Topic. I want to
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