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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.
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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.
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 some tips in
buying a franchise:
DO:
1. 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.
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. 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.
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.
8. Know and understand all
the terms of your purchasing contract.
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.
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DON'T:
1. 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. 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. 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. 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. Settle.
Get the business
you want, not the first one that comes along.
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