There’s a scenario in which an aspiring entrepreneur opens a business that has brand recognition, a proven marketing campaign, financial guidance, and even an immediate client base.
Sound too good to be true? Well, think about how excited you were when that new Panera Bread opened in your neighborhood, or how you love coming home the day the Merry Maids have cleaned your house.
These businesses are franchises, and buying one is an option that may appeal to you.
Many potential entrepreneurs are put off by the risk involved in starting a brand-new business, which makes buying a franchise an attractive alternative to going it completely alone.
What is a Franchise?
The Small Business Association (SBA) defines a franchise as a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise is the agreement that governs the method of conducting business between the two parties. In most cases, a franchisee sells goods or services supplied by the franchiser.
In certain ways, franchising seems like a win-win situation for those involved. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that would not otherwise be available to the franchisee. In turn, the franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.
Types of Franchises
There are two forms of franchising:
- Product/trade name franchising
- Business format franchising
In the first form, a franchiser owns the right to the name or trademark and sells that right to a franchisee.
Business format franchising is more complex, involving a broader ongoing relationship between the two parties. These franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
How to Get Started
Unless there is a specific company that you want to be involved with, attending a franchise exposition is an excellent way to compare a variety of options. Do some research to determine what type of franchise is right for your financial situation, experience, and goals. Then comparison shop for the one best suited to your needs.
When you purchase a franchise, you are making an investment in the company. It’s important to have an honest accounting of how much you can afford to spend. You also need to know how much operating capital you will need once you start your business. Discuss financial requirements with the franchiser before making a commitment.
What Type of Business is Right for You?
Even though a good deal of the set-up and marketing will be in place, you should still be sure that you’ve chosen a field that really interests you. Don’t base your entire decision on money and profit. Purchasing a Carvel franchise if food service doesn’t appeal to you will not make you happy in the long run. Can you see yourself working in the industry for the next twenty years? Do your skills and experience match what you’ll need to operate the franchise?
Do Your Research
Check with several franchise exhibitors that are in the type of industry you want to work in. As you listen to the exhibitors’ presentations and enter into discussions with others, be sure these questions are answered:
- How long has the franchiser been in business?
- How many franchised outlets currently exist, and where are they located?
- How much is the initial franchise fee? Are there additional startup costs? Are there any continuing royalty payments?
- What management, technical, and ongoing assistance does the franchiser offer?
- What controls or restrictions does the franchiser impose?
Get it in Writing
Some franchisers may tell you how much you can earn if you invest in their franchise system, or how current franchisees in their system are performing. Don’t settle for this. The Federal Trade Commission requires that franchisers provide you with written substantiation of such claims. Be sure to ask for written substantiation for any income projections or income or profit claims. If the franchiser does not have the required substantiation or refuses to provide it to you, you might want to reconsider your investment.
Don’t be Pressured
If you are told that the franchiser’s offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price, don’t jump at the offer. That is classic sales pressure, and you should not succumb to it for such an important decision. Legitimate franchisers expect you to comparison shop and investigate their offering.
Study the Offering Carefully
Do not sign a contract or make a payment until you have thoroughly investigated the franchiser’s offering. The FTC’s Franchise Rule requires the franchiser to provide you with a disclosure document containing important information about the franchise system. Study the disclosure document; it might be wise to consult an attorney and accountant. Arrange to speak with current and former franchisees about their experiences.