A CONSUMERS GUIDE TO BUYING A FRANCHISE
Many people dream of being an entrepreneur. By purchasing a franchise, you often can sell goods and services that have instant name recognition and can obtain training and ongoing support to help you succeed. But be cautious. Like any investment, purchasing a franchise is not a guarantee of success.
A franchise typically enables you, the investor or "franchisee," to operate a business. By paying a franchise fee, which may cost several thousand dollars, you are given a format or system developed by the company ("franchisor"), the right to use the franchisor's name for a limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an operating manual; and advise you on management, marketing, or personnel. Some franchisors offer ongoing support such as monthly newsletters, a toll free 0800 telephone number for technical assistance, and periodic workshops or seminars.
While buying a franchise may reduce your investment risk by enabling you to associate with an established company, it can be costly. You also may be required to relinquish significant control over your business, while taking on contractual obligations with the franchisor.
Below is an outline of several components of a typical franchise system. Consider each carefully.
|initial franchise fee and other
expenses. Your initial franchise fee, which may be non-refundable, may
cost several thousand to several hundred thousand dollars. You may also
incur significant costs to rent, build, and equip an outlet and to
purchase initial inventory. Other costs include operating licenses and
insurance. You also may be required to pay a "grand opening"
fee to the franchisor to promote your new outlet.
||continuing royalty payments. You may
have to pay the franchisor royalties based on a percentage of your
weekly or monthly gross income. You often must pay royalties even if
your outlet has not earned significant income during that time. In
addition, royalties usually are paid for the right to use the
franchisor's name. So even if the franchisor fails to provide promised
support services, you still may have to pay royalties for the duration
of your franchise agreement.
||advertising fees. You may have to pay
into an advertising fund. Some portion of the advertising fees may go
for national advertising or to attract new franchise owners, but not to
target your particular outlet.|
|site approval. Many franchisors
pre-approve sites for outlets. This may increase the likelihood that
your outlet will attract customers. The franchisor, however, may not
approve the site you want.
||design or appearance standards.
Franchisors may impose design or appearance standards to ensure
customers receive the same quality of goods and services in each outlet.
Some franchisors require periodic renovations or seasonal design
changes. Complying with these standards may increase your costs.
||restrictions on goods and services
offered for sale. Franchisors may restrict the goods and services
offered for sale. For example, as a restaurant franchise owner, you may
not be able to add to your menu popular items or delete items that are
unpopular. Similarly, as an vehicle transmission repair franchise owner,
you might not be able to perform other types of automotive work, such as
brake or electrical system repairs.
||restrictions on method of operation.
Franchisors may require you to operate in a particular manner. The
franchisor might require you to operate during certain hours, use only
pre-approved signs, employee uniforms, and advertisements, or abide by
certain accounting or bookkeeping procedures. These restrictions may
impede you from operating your outlet as you deem best. The franchisor
also may require you to purchase supplies only from an approved
supplier, even if you can buy similar goods elsewhere at a lower cost.
||restrictions of sales area. Franchisors
may limit your business to a specific territory. While these territorial
restrictions may ensure that other franchisees will not compete with you
for the same customers, they could impede your ability to open
additional outlets or move to a more profitable location.|
|franchise terminations. A franchisor
can end your franchise agreement if, for example, you fail to pay
royalties or abide by performance standards and sales restrictions. If
your franchise is terminated, you may lose your investment.
||renewals. Franchise agreements
typically run for 15 to 20 years. After that time, the franchisor may
decline to renew your contract. Also be aware that renewals need not
provide the original terms and conditions. The franchisor may raise the
royalty payments, or impose new design standards and sales restrictions.
Your previous territory may be reduced, possibly resulting in more
competition from company-owned outlets or other franchisees.|
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.
|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?|
|Does the franchise require technical
experience or relevant education, such as vehicle 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
|What are your goals?
||Do you require a specific level of
||Are you interested in pursuing a
||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?|
Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, likely competition, the franchisor's background, and the level of support you will receive.
|The company's name and how widely
recognized it is. -- If it has a registered trademark.
||How long the franchisor has been in
||If the company has a reputation for
quality products or services.
||If consumers have filed complaints
against the franchise with a local consumer protection agency.|
Carefully consider how long the franchisor has managed a franchise system. Do you feel comfortable with the franchisor's expertise? If franchisors have little experience in managing a chain of franchises, their promises of guidance, training, and other support may be unreliable.
|Continuing royalty payments.
||Advertising payments, both to local and
national advertising funds.
||Grand opening or other initial business
||Business or operating licenses.
||Product or service supply costs.
||Property and leasehold improvements.
||Discretionary equipment such as a
computer system or business alarm system.
||Financial and accounting advice.
||Compliance with local ordinances, such
as zoning, waste removal, and fire and other safety codes.
||Employee salaries and benefits.|
It may take several months or longer to get your business started. Consider in your total cost estimate operating expenses for the first year and personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. Perhaps you can get a better deal with another franchisor. An accountant can help you to evaluate this information.
|The supplier of goods from whom you may
||The goods or services you may offer for
||The customers to whom you can offer
goods or services.
||The territory in which you can sell
goods or services.|
Understand that restrictions such as these may significantly limit your ability to exercise your own business judgment in operating your outlet.
|How many employees are eligible for
||Can new employees receive training and,
if so, is there any additional cost?
||How long are the training sessions?
||How much time is spent on technical
training, business management training, and marketing?
||Who teaches the training courses and
what are their qualifications?
||What type of ongoing training does the
company offer and at what cost?
||Whom can you speak to if problems
||How many support personnel are assigned
to your area?
||How many franchisees will the support
||Will someone be available to come to
your franchised outlet to provide more individual assistance?|
The level of training you need depends on your own business experience and knowledge of the franchisor's goods and services. Keep in mind that a primary reason for investing in the franchise, as opposed to starting your own business, is training and assistance. If you have doubts that the training might be insufficient to handle day-to-day business operations, consider another franchise opportunity more suited to your background.
|How much of the advertising fund is
spent on administrative costs?
||Are there other expenses paid from the
||Do franchisees have any control over
how the advertising dollars are spent?
||What advertising promotions has the
company already engaged in?
||What advertising developments are
expected in the near future?
||How much of the fund is spent on
||How much of the fund is spent on
advertising in your area?
||How much of the fund is spent on
selling more franchises?
||Do all franchisees contribute equally
to the advertising fund?
||Do you need the franchisor's consent to
conduct your own advertising?
||Are there rebates or advertising
contribution discounts if you conduct your own advertising?
||Does the franchisor receive any
commissions or rebates when it places advertisements? Do franchisees
benefit from such commissions or rebates, or does the franchisor profit
If you buy an existing outlet, ask the franchisor how many owners operated that outlet and over what period of time. A number of different owners over a short period of time may indicate that the location is not a profitable one, or that the franchisor has not supported that outlet with promised services.
Obtain the names and addresses of current franchisees and franchisees who have left the system within the last year. Speaking with current and former franchisees is probably the most reliable way to verify the franchisor's claims. Visit or phone as many of the current and former franchisees as possible. Ask them about their experiences. See for yourself the volume and type of business being done.
|How long has the franchisee operated
||Where is the franchise located?
||What was their total investment?
||Were there any hidden or unexpected
||How long did it take them to cover
operating costs and earn a reasonable income?
||Are they satisfied with the cost,
delivery, and quality of the goods or services sold?
||What were their backgrounds prior to
becoming a franchisee?
||Was the franchisor's training adequate?
||What ongoing assistance does the
||Are they satisfied with the
franchisor's advertising program?
||Does the franchisor fullfill its
||Would the franchisee invest in another
||Would the franchisee recommend the
investment to someone with your goals, income requirements, and
Be aware that some franchisors may give you a separate reference list of selected franchisees to contact. Be careful. Those on the list may be individuals who are paid by the franchisor to give a good opinion of the company.
Before you invest in a franchise system, investigate the franchisor thoroughly. In addition to reading the company's Franchise Agreement and speaking with current and former franchisees, you should speak with the following:
Franchise contracts are usually long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you to understand your obligations under the contract, so you will not be surprised later. Choose a lawyer who is experienced in franchise matters.
It is best to rely upon your own lawyer or accountact, rather than those of the franchisor.
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