If the idea of starting a business of your own from scratch is scary, you may consider buying an existing franchise from a company that has already established a track record of success and will teach you how to use their proven methods.
What is a franchise? A franchise agreement is when one party, the franchiser, grants to another party, the franchisee, the rights to market and distribute a trademarked product or service in exchange for royalties. A franchise is a simple way of becoming an entrepreneur with a built-in market and proven product. Thus, purchasing a franchise is a perfect opportunity for small business ownership for those with little or no business experience. Your support system already exists from the very beginning.
Franchising in the United States is an $800-billion-a-year industry, the fastest growing of which are service oriented. The reason is simple: the success rate of franchising is much greater than for the independently created business. Some 600,000 franchised small business owners provide jobs for more than eight million American workers. There is virtually no product or service that can’t be bought through a franchised business. But it is not for everyone, and it is not a get-rich scheme.
>> RELATED: Directory of Home-Based Franchises
Over 10 percent of franchises can be run from home. Examples of the types of service-business franchises that can be run from home include cleaning services like Duraclean International; Pet Tenders, who provide boarding and walking services for pets; and directory publishing like Finderbinder/Sourcebook Directories. Another example is ABS Systems, a franchise that provides financial support services to small businesses, including bookkeeping, tax preparation, and financial planning.
Here are the do’s and don’ts in buying a franchise:
Do’s in Buying a Franchise
1. Research the franchise opportunity.
Investigate franchise opportunities by visiting a franchise opportunity trade show or contacting a franchise agent. Follow up any interest by talking to as many franchisees as possible. Be careful: there are thousand of franchise offerings, and not all of them are good opportunities. Read “Buying Your First Franchise” and “Franchise Opportunities: 5 Important Points to Consider.”
2. Talk to the present owners of the franchise.
Ask them how pleased they are with their decision, how good their business is doing and whether they met projections. Inquire if the franchiser is responsive to their needs and whether the training was adequate. It is important to determine the integrity of the franchiser in following through on promises to provide strong initial training and to supply immediate technical assistance when problems arise.
3. Consult any and all advisers you feel can help you.
Have your accountant review the audited financial statements presented to you. Bring in your lawyer to help you review all the legal documents.
4. Understand the UFOC
Read thoroughly the Uniform Franchise Offering Circular (UFOC), a disclosure document where the franchiser must disclose certain specified information. The Federal Trade Commission requires all franchisers to supply prospective franchisees with a UFOC at least 10 days before.
5. Even with the UFOC, make sure to ask all the questions you can.
No question is too trivial. Do not assume that the UFOC holds the complete story. Confirm and challenge the information provided to you. Read Checklist of Questions to Answer Before You Buy a Franchise
6. Compare other franchise systems in the same field.
Look for franchises that are solidly managed, well financed, and are positioned in a growth industry. Investigate any regional franchises that are doing well but have not yet gone national in their distribution.
7. Evaluate yourself and see if franchising is really for you.
For some people, a franchise simply represents a job transfer given the restrictions and regulations of many franchisers. Another important factor to consider is the higher cost it entails. Read the article “Pros and Cons of Franchising.”
8. Know and understand all the terms of your purchasing contract.
It is important that you thoroughly understand what you’re getting into — and what you can and cannot do when you purchase the franchise. Read the article How to Turn a Franchise Agreement to Your Advantage.
9. Check the history and experience of the franchise’s officers and managers.
The UFOC should contain a disclosure of all administrative, criminal or material civil litigation currently pending or completed against the franchiser involving any alleged allegation of fraud, misrepresentation or any violation of the franchise laws.
10. Research, research, research.
Buying a franchise is a complex process and must be approached with caution. The more information you know, the better your decision is likely to be and the less risk you will be exposed to. Remember, only you can determine if owning a particular franchise is right for you, and most likely the decision will be based on two factors: your investment and risk capabilities.
Don’ts in Buying a Franchise
1. Don’t Hurry.
Shortening your research will increase your likelihood of failing. As is true of many business decisions, timing and ability to calculate risks play a major role in selecting a franchise.
2. Don’t Overextend your Finances.
The more established a franchise, the less risk it carries but the higher the investment needed. The McDonald’s, Kentucky Fried Chicken and Pizza Huts now require steep investments. Even some home-based franchises may have royalty fees that are too steep to justify the amount of money you can earn from running a one-person or two-person business. Always plan for more expenses than you think you’ll have.
3. Don’t Skip Consulting the Professionals.
The franchise agreement is a lengthy and complex legal document and should be reviewed by your attorney before making a commitment. Skimping on fees will deprive you of critical information.
4. Don’t Take Anyone’s Word.
It’s your risk and opportunity. Be aware of current marketing trends within industries that indicate potential weaknesses such as price wars. Also, try to know how economic factors and changes in the society (e.g. aging population) could potentially affect the industry.
5. Don’t Settle.
Get the business you want, not the first one that comes along. You’ll know when you find the right franchise opportunity for you. Keep looking for what you really want.
Recommended Books on Buying a Franchise:
- The Educated Franchisee: The How-To Book for Choosing a Winning Franchise, 2nd Edition
- Become a Franchise Owner!: The Start-Up Guide to Lowering Risk, Making Money, and Owning What you Do
- The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling or Investing in a Franchise
- The Franchise Fraud: How To Protect Yourself Before And After You Invest
- Franchise Times Guide to Selecting, Buying & Owning a Franchise