11 Things You Need To Know About
Buying A Franchise
- Know Your Rights as a Potential
Franchisee
Before you begin to investigate the
possibilities of purchasing a franchise it might be important to
you to know that you have rights. The Federal Trade Commission
strictly prohibits franchisors from doing certain things that may
put pressure on you to make an immediate decision. Franchise
regulations require a franchisor to provide you with full
disclosure of their business opportunity in the form of an
offering circular referred to as a Uniform Franchise Offering
Circular. This document must comply with regulations governing the
offering of a franchise. In addition, the franchisor is required
to allow you 10 business days to review the document before they
can require any payment of fees or signing of a franchise
agreement. Any franchisor that violates these requirements can be
subject to penalties, fines or prospecution. Also, you might
reside in a State where there are laws that the franchisor must
comply with.
- The Success of Franchising
The
success of franchising is unquestionably tremendous. This is due
to a number of reasons. The major reason is franchisors are very
selective in who they award a franchise too. Most franchisors have
a profile of who the franchise candidate will be and if you fit
the profile your changes of qualifing increases. No other business
mood has the success of franchising. According to the U. S.
Department of Commerce, the failure rate of franchising is less
than 4%.
- Two Types of Franchisors
The two
types of franchisors are simply mature and infant. A mature
franchisor has years of experience in franchising and their
network is proven, tested, tried and have franchisees who will
testify to the value of the franchise business. While an infant
franchisor is someone who is just getting started in their
franchise venture and may not have all of the tools and techniques
in supporting a franchise network in place yet. This is not to say
an infant franchisor is not a good purchase. Keep in mind that all
franchisors started as an infant franchisor. There are many
advantages in purchasing from an infant
franchisor.
- Two Types of Franchises
The two
types of franchises are simply investment and job franchises. An
investment franchise is a business that can possibility be an
absentee owner that creates equity in the business within a short
period of time. An example might be a fast food franchise. These
franchises are often more expensive but can be very valuable over
a period of time. The job franchise is where the franchisor is
offering a business that allows the owner to enter a business that
produces daily income. Usually this is a service
business.
- Full Disclosure
The decision to
purchase a franchise business can be an exciting and rewarding
decision.
There are many franchises, which offer to the
buyer, opportunity, independence, growth, challenges, a
comfortable income, prestige and security. However, many important
questions need to be answered, both of you and by the franchisor
before making any commitment to buy. The franchisor is
required by the Federal Trade Commission (FTC) to furnish a
potential buyer with a full disclosure document at the first
personal meeting. This disclosure will contain information
concerning the material facts about the franchisor. Such things
as: the business background of the franchisor; who the officers,
directors and key personnel are; the initial fees and cost of
getting into the business; various obligations of both the
franchisor and franchisee before and after the business is opened;
the terms and conditions of the franchise; a copy of the actual
franchise agreement; and many other matters that are important to
your decision.
- Never rely on verbal commitments or promises from a
franchisor or franchise broker.
- Get everything that may be interpreted as a promise
in writing, especially if the promise, projection or commitment
is not in the franchise agreement.
- It is important to understand that a franchise
is a contractual relationship.
What you buy when
purchasing a franchise is an agreement. Most people believe the
franchise to be the brick and mortar, the concept or idea that is
being offered as an investment, the operations of the business or
a variety of other things that only describe the franchise. In
every franchise sold, a contractual relationship is formed between
the franchisor and franchisee, which may be binding for, as many
as twenty years or more. The value or worth of the franchise
business will be determined by what is contained in the agreement.
Too many buyers get caught up in the “dog and pony” show, while
all excited by the “horns, whistles and sirens” going off or
paying too much attention to the “sizzle” of the business. Don’t
overlook the fact that you are buying an agreement and you must be
able to live that agreement.
- Study the agreement very carefully.
Know and understand what it says. Anything you don’t
understand should be explained to you in writing. Don’t rely on
verbal interpretation or explanations. If the agreement doesn’t
say it and the basic disclosure document don’t address it, don’t
be fooled into believing what someone might verbalize to
you.
- Franchise agreements are usually not
negotiable.
The primary reason that franchise
agreements are not negotiable is because they need to be uniform.
That is to say, everything franchisee is offered the same thing.
However, this may vary with an infant (a new franchising company)
franchisor. An infant franchisor is one who has just begun
offering his franchises and may not have his first franchisee yet.
To induce or entice the first franchisee, the franchisor may
reduce or even waive the franchise fee, offer lower royalty fees,
or make available additional franchise agreements at a bargain
price. However, the basic disclosure document should indicate
whether or not the agreement is uniform.
- Another very important area to be considered is
the background of the officers, directors and key personnel of the
franchisor.
In most new franchise offerings, the
business experience of the franchisor may be limited. You must
evaluate and determine whether or not you can be properly trained,
supported and benefit from the management of the franchisor. Since
as many as 50% to 60% of all new franchise businesses entering the
franchise arena do not have company operations or prototypes, you
will need to investigate the knowledge, experience, background and
credentials of the people behind the franchise business very
closely. You will want to know whom you will be involved with for
the next twenty years or more.
- If the business being offered has existing
franchisees, take the time to contact as many of them as you can.
Ask such questions as: are you satisfied with your
franchise?; has the business lived up to your expectations?; did
you receive the type of training you expected?; are you satisfied
with the support you are receiving?; is the business making the
kind of income you expected? And can you recommend the business to
me? Listen very carefully to the answers that are given to you. Is
there still excitement in the voice of the franchisee? What is the
franchisee really saying to you?
- Capital:
You will need seed money
of your own plus sufficient cash to maintain a positive cash flow
for at least the first year. In a future session you will
learn how to forecast future cash requirements through cash flow
control. Many businesses can be started on a very small scale with
a small investment. Then, as the business grows and you gain
experience, cash flow from your business can be used for growth.
In some cases you don't need starting capital to hire other people
because you might start by doing everything yourself. The "do it
yourself" start is a good way to learn everything about your
business and also makes you better qualified to delegate work to
others later on. You can control your risk by placing a limit on
how much you invest in your business.
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