HOW TO INVEST IN THE RIGHT FRANCHISE
What is Franchising?
Franchising refers to the method of practicing and using another’s perfected business concept. In a franchise relationship, the franchisee is granted the right to market a product or a service under a marketing plan or a system that uses the trademark, name, logo and advertising owned by the franchisor.
What are the different types of franchising?
Product franchising, also known as trade name franchising, is that type of franchising wherein a manufacturer grants a franchisee the right to sell its products, but with no method of doing business. Examples of this type of franchising are car dealerships and service stations.
The business format franchising, also identified as a name and process franchise, features a broader and ongoing relationship between the franchisor and the franchisee, wherein aside from granting the right to use the name and market the products and services of the franchisor, the franchisee is also provided a complete plan for managing and operating the business – a transfer of the proven way of doing business that has been developed by the franchisor. This plan often includes a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing. All of the franchisor’s operating systems, technical expertise, marketing systems, training systems, management methods and essentially all relevant information, are transferred to the franchisee.
With the means of distributing goods and services perfected, rapid expansion of a successful business concept occur more quickly. Modern day franchising is primarily in the business format mode, accounting for around 90% of franchise businesses worldwide. PFA is an association of franchisors who are into business format franchising.
What are the advantages and challenges of franchising?
• High success rate
A franchise is a business model based on proven ideas and implementation. As opposed to having to build a new business from scratch, a franchise business comes with a reduced calculated risk.
• Recognized brand and trademark
A franchise offers a product or a service that has become a household name. The powerful brand names that your franchise carry will guarantee your success.
• You are not alone
Franchisors discover and perfect operating and management efficiencies that they pass on to their franchisees. These powerful and superior training and coaching system offered by the franchisors are designed either to help a franchisee overcome his lack of experience in running a business, or polish an acquired business sense.
• Ease in financing / Re-saleability of the franchise
Financial help for businesses with established good reputation come easy. Businesses with high success rates get nods for loans from banks and financial institutions. Moreover, a good franchise is an appreciating asset, thus maintaining its re-saleability at all times.
• Huge profit
Through the franchisors, obtaining lower-cost materials and supplies is possible. This benefit, coupled with the right marketing strategy, brand positioning, and growth of the customer base, could only translate to increase in sales and immense profit.
As franchising involves the use of a proven business expertise, trademark, knowledge and training, the franchisee is required to follow the system. Some franchisors impose on a certain degree of control that makes following the system difficult.
• On-going costs
Aside from the franchise fee and royalty, franchisees pay a certain percentage of their franchises’ revenues to the franchisor each month. Additional fees for services provided, such as advertising costs, are also charged regularly to franchisees.
• Failed expectations
Conflict may arise in a franchisor-franchisee relationship due to incompetence. Franchisors can destroy its franchisees by failing to give ample support or by squeezing them too aggressively for profits. On the other hand, franchisees who tend to be lax in adhering to franchise agreements create dents on the established system, later on creating damage to the business or the brand.
What is a good franchise business?
• Unique. A fresh or unique concept that has the potential to expand nationally, and even internationally.
• Profitability. The business must be consistently profitable.
• Systematized. The business operating systems should be polished and efficient. These systems and procedures should be in manual form.
• Training. The transfer of knowledge through training should be relatively easy for others.
• Excellent margins. The profit margins built into the concept should be viable enough that every franchisee who adheres to the franchise system can realize an attractive Return on Investment.
Are you franchisee material?
A good franchisee is an important part of a successful franchise chain. Evaluate your ability to be a good franchisee with these qualities:
• Avid learner. Someone eager to learn will be receptive to the training and knowledge a franchisor will impart.
• Effective communicator. A franchisee with good communication skills will be effective in conveying their thoughts and ideas to different individuals in their course of work.
• Ample experience. General business skills, such as marketing, sales or administrative expertise, will come in handy for a franchisee.
• Financially capable. Financial capability is essential in making a franchise fruitful. The required money should be complemented with proper financial planning to run the business till it breaks even.
• Awareness of the brand. A prospective franchisee’s ample knowledge about the product or a service indicates whether he is really serious in getting a franchise or not.
• Open to new ideas. A good franchisee must be open to new ideas in order to make it easy for the franchisor to introduce changes in the system that can be beneficial for both of them.
• Ready to follow. A franchisee must be ready to follow the prescribed set of rules and regulations contained in the franchise agreement. This is important in maintaining the proven business system developed by the franchisor.
• Original thinkers. Though it’s necessary that a franchisee be a good follower, he should also be able to think for himself. However, it must be made clear that franchisors are to be consulted first at every stage of introducing a new change in the system.
What should I consider before buying a franchise?
1. Ask yourself why you want to own a franchise.
2. Begin the search. Look for opportunities that are in harmony with you and that greatly interests you.
3. Do your own research:
• Have a complete understanding of the business.
• Check on the business experience and track record of the franchisor.
• Check your personal resources – experience in running the business; the hours and personal commitment to run the franchise; and, how much money is to be invested.
• Determine the terms and conditions of the franchise agreement.
• Get information on the franchise by visiting stores and interviewing existing franchisees.
• Check on necessary government and other related permits.
4. Concept – Look into the product or service and discern what makes it stand out among other businesses.
5. Location, location, location – Ask about the territory rights. Make sure that you get a good site selection.
The Franchise Agreement
The Franchise Agreement (FA) is the legal document which details the rights and obligations of the franchisor and the franchisee, including the length of term, the start and end periods of the agreement, the renewal provisions and the end of the contract.
What is included in the Franchise Agreement?
Terms of Agreement - The FA carries a contract explanation detailing the type of relationship a franchisee is entering into with the franchisor. Since a franchise relationship is temporary in nature, the FA should specify how long the agreement will last. At the end of that appointed period, the franchise is considered null and void.
Renewal - Renewal period grants the franchisor the chance to review the FA thus enabling him to decide whether to renew the agreement or not. The franchisee’s good performance is the most common of all criteria. However, a renewal does not guarantee the retention of the original terms and conditions of the agreement. If applicable, a renewal fee is also charged by the franchisor.
Investment Amount and Fees - This part of the FA explains the total investment cost and its inclusions, as well as the date a franchisor is to be paid. Included in these are:
Franchise fees - The initial franchise fee, which may be non-refundable, is paid at the start of a franchise relationship thus giving the franchisee the right to engage in the business using the franchisor’s name and business system.
Royalties - Royalties are usually a percentage of the franchisee’s sales and are typically paid weekly, biweekly or monthly.
Marketing contribution - System-wide marketing contributions are also based on the percentage of franchisee’s sales.
Training and Support – The FA should state the kind of training and support the franchisor will provide.
Purchase of Products - Products and supplies used in the franchise system should maintain consistency. Hence the FA specifies that the franchisee may only buy from suppliers accredited by the franchisor. A detailed list of approved suppliers is also provided in the Operations Manual.
Territory- The Territory determines the geographical boundaries a franchisee may operate, or within which no other unit of the franchisor’s businesses may compete.
Termination - The FA carries in it the grounds for termination of the contract. In some cases, violations of such conditions may still be remedied, however if repeated over time or failure to act on them will still lead to termination of the contract.
Agencies to go to for help in Franchise Business:
1. Philippine Franchise Association (PFA)
Unit 701 OMM-Citra Building
San Miguel Avenue, Ortigas Center, Pasig City
Tel. Nos.: 687-0365 to 67; 798-2543; 579-4840
Fax No.: 687-0635
2. Bureau of Trade Regulation and Consumer Protection (BTRCP)
2/F Trade and Industry Building
361 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 751-0384 loc. 2221-2229
Fax No.: 890-4949
3. Securities and Exchange Commission (SEC)
SEC Building, EDSA, Greenhills, Mandaluyong City
Tel. Nos.: 726-0931 to 39
Fax No.: 725-5293
Advantages and Challenges of Franchising
Advantage #1 - The Experience of the Franchisor
When an individual buys a franchise, he purchases the years of experience and the proven methods of the franchise system, also known as the franchisor. One franchisee expressed it this way: “What I have learned from the franchisor was worth ten times what I paid for the franchise”. In any new business, much time and money are spent in trial and error. A proven franchise may eliminate many of the start-up problems. This reason permits one to open a franchise business with little or no previous experience in a given industry.
Advantage #2 – Training
A franchise system will provide training for the new franchisee. This is usually done at the home office and at the franchisee’s place of business. This training should prepare the new owner in all facets of the business.
Advantage #3 – Buying and Advertising
Most small-business people cannot afford inventory products in bulk or extensive advertising. The franchisee buys this advantage when he or she purchases the right to use the franchise system’s purchasing power and advertising. Most system provide advertising. Most systems provide advertising help and direction. Furthermore, as the number of franchisees increases, so does public awareness of the franchise. This can be tremendous advertising advantage. Also, franchisees that are located near one another can advertise together thus reducing cost.
Advantage #4 – Ongoing Advise, Research and Development
Franchisees needs assistance throughout the term of their business endeavors. The franchise system’s staff of experts can give this needed help in all aspects of the business. The franchisor is also in a position to provide on-going research and development. Thus, new products and services will be brought to the attention of the franchisee.
Advantage #5 – Business Synergy
The word “synergy” refers to the idea that the sum of the whole is greater than the separate parts. This principle can be applied to franchising. Those who buy a franchise become a part of a “family” where all members work together for the good of the whole. Indeed, there can be support and assistance in a franchise organization that assists everyone in becoming successful. Often, some of the most effective ideas come from franchisees who in turn share their ideas with the corporate office and with other franchisees.
Challenge #1 – Working Within the System
People who have difficulty following directions or who dislike working within a system may find franchising extremely frustrating. Conformity to the franchise system is critical if consistency among franchises is to be maintained. However, there are as such as marketing where a franchisee can be creative.
Challenge #2 – The Risk
While it is true that purchasing a franchise has less risk than starting an independent business, there still are risks. Because you own the business, you, to a great extent, determine the success of your venture. The franchisor may have a great program and a respected name, but in the final analysis much of the risk is in your hands.
Challenge #3 – Working With the Franchise System
Buying a franchise can be closely compared to entering into a marriage. Both are legally binding relationships that can last for a long time. Your relationship with the franchisee system and its staff will extremely important. Get to know the franchise system through the following methods.
A. Visit the corporate headquarters. Seek to get a feel for the staff and how smoothly the operations runs.
B. Talk to other franchisees. Ask what their relationship with the franchisor like.
C. Read as much about franchise as possible.
Challenge #4 – False Expectations
Some people enter franchising expecting instant success. Perhaps the reason some expect this is the tremendous success achieved by some franchisees. However, this success did not come without hard work and great effort. Franchising, like any other business, requires tremendous time, initiative and industry. Obtain from the franchisor as realistic a picture as possible as to what is required in operating that particular franchise.
Challenge #5 – Managing the Business
Some individuals are more prepared to manage a business than others. They have some business experience and have learned to get along well with people. Other individuals may find that managing a franchise is a tremendous burden. You must honestly assess your preparation to run a business. If you find that you have little or no experience, you may want to seek special assistance from the franchisor in the business management.
Tips and Traps
Franchising in the Philippines has never been bigger. Year on year, the industry grows exponentially. This is probably the reason why more and more people are investing in franchises rather than setting up new businesses that they start from the ground up.
Statistics indicate that the success rate in franchising is 90%. Traditional businesses, on the other hand, will give you a 25% chance of survival. While this points to the obvious that franchising is your best option in your dive into the ocean of entrepreneurship, you still here accounts of people that fail in their endeavors.
This is the 10% that is hardly spoken about. This is the 10% that shatters dreams. This is the 10% that leads to disillusionment. Do we now join the ranks of franchising’s naysayers and avoid the industry like a plague? Or do we arm ourselves with knowledge that will lead us to a point where we get to an informed decision with regard to franchising?
This article will be about the second option. We need to know what franchising’s obstacles are and how to hurdle them. Better yet, we will show you what they are so that you can avoid them altogether. We’ll point out the traps. We’ll give you the tips. Hopefully all of us will be wiser because of this.
TRAP # 1 – Franchising is easy.
Most people will think that getting a franchise is easy. All you have to do is pay the fees, go through training and voila!, you have an instant business. While it is true that you get a head start in whatever business you got into because of the systems that your franchisor already has in place, this doesn’t mean that it’s going to be a walk in the park. Your brand needs commitment. And this means hard work on your part.
To illustrate what I mean, take employment, for example. You go to work Monday to Friday, 9 to 5. You get to keep your weekends for yourself. Just do your job properly and perform, you’ll be getting your salary every 15th and 30th of the month, guaranteed.
When you get into franchising, your concerns for your business now become 24/7 concerns. You’ll have to put in longer hours. You cannot just shut down and come back the following day. You have to give your business its due attention. You have to be hands-on. And while all of these are happening, you’re not quite sure if you’ll be getting anything in the form of salaries since you’re just starting your business.
TIP: Do a self-assessment.
Do a self-check when considering getting a franchise. Can you work well into the night? Do you have energy for this endeavor? Are you willing to go 24/7 for your business?
You have to answer these questions and it has to be very clear to you that you are ready and committed to running a business.
TRAP # 2 – Franchising means instant success.
Nothing could be further from the truth! A lot of us will think that just because we see a lot of outlets of a particular brand, getting a franchise and operating the outlet will get you tons of money. Sure, you see these branches serving lots of customers, churning out huge sales and basically doing good business. You might have gone to the outlet during peak hours and ended up thinking that that was how they performed for the whole day. On this, you have to go beyond that initial impression.
We mentioned earlier that franchising is a lot of work. What people sometimes fail to realize is that it also takes time to make a concept work. You have to put in the hours, be hands-on and mindful of your operations.
TIP: Study the concept.
Go around and visit the stores. If at all possible, talk to existing franchisees. Visit during different times of the day to see how well they sell at that particular time. You’ll get a clearer picture of your intended business if you do it this way.
It will also get you grounded to the reality that peak hours do not last the whole day. That’s fine, all business operate that way. But it would be to your advantage if you are clear on this from the very beginning.
TRAP # 3 – I can operate my franchise anywhere.
We see restaurant outlets all over the city. We even see them in the provinces. The same thing goes for other retail and service concepts. But what might have gotten you interested in franchising are the small carts or kiosks. Let’s discuss this a bit more as this a great example why some concepts cannot just be opened anywhere and everywhere.
As an example, let’s say you got interested in a cart concept that serves cold mixed drinks. This was a couple of months back at the start of summer season. The franchisor was able to expand very fast due to the high demand for their products. Stores were opening left and right.
Having seen this, you applied for a franchise thinking that you would do good business in front of your house. You won’t be paying rent for the space and you wouldn’t have to hire anyone since your siblings can operate the store while they are on summer break. But you failed to do any feasibility analysis. You’ll be saving a lot on operating expenses for sure, but do you have enough people in your area who will buy your product? Are you in a high traffic densely populated area?
TIP: Do a market study.
Check your demographics. Check if there are enough possible customers in the area. Know the busiest times of the day. Verify if your target customers can afford your products. Get these done and you’ll have a better feel for your brand.
TRAP # 4 – I have to sign up right away.
I’ve seen a few franchisors get creative with their franchise sales. They offer huge discounts on franchise fees if you sign up with them right away. On your end, it may seem harmless. You’ll get a huge amount in savings and will get a business right away.
There’s nothing wrong with that per se but in this situation, you might be getting the short end of the stick. Why? By signing right away, you might have not gotten the chance to review the business properly. You may get to sign the franchise agreement without having gone through all of the provisions. What could these result in?
A bad investment, for starters. A discount upfront does not necessarily mean you got a good deal. You may have saved on the franchise fee but since you didn’t get to review the business, you failed to notice that you’re products have very short expiry periods. Or that your rent is too high. You might end up owning a business with very high costs with very slim margins.
In addition to this, by signing up right away, you may have inadvertently agreed to some provisions in the franchise agreement that you are totally opposed to. Not having the time to review the document may be a source of conflict in the future.
TIP: Take your time and review, review, review.
Don’t be in a rush to get a franchise. Don’t base it solely on the promise of good discounts. Do your numbers. Read the franchise agreement. Consult a lawyer if you have to. The point I’m making here is that you should be cautious while you are searching for the best franchise for you. In the end, you’ll end up happy knowing that you made the right decision.
These are just some realities people go through in their search for their dream franchise. There may be more but the points discussed above, I believe, are the most important and relevant issues that everyone should tackle in their franchise search.
I encourage everyone to shop around for your desired franchise. Don’t rush. Do your research and review all materials and documents. Go through this exercise and you’ll be on your way to getting the best franchise for you.
Federal Trade Commission’s Consumer Guide to Buying A Franchise
Many people dream of being an entrepreneur. By purchasing a franchise, you can sell goods and services that have instant recognition and can obtain training and ongoing support to help you succeed. But be cautious. Like any investment, purchasing a franchise does not guarantee success.
To help evaluate whether owning a franchise is right for you, the following information will help you understand your obligations as a franchise owner, how to shop for franchise opportunities, and how to ask for the right questions before you invest.
The Benefits And Responsibilities of Franchise Ownership
A franchise typically enables you, the investor or “franchisee” to operate 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 franchisors’ 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 and personnel. Some franchisors offer ongoing support such as monthly newsletters, a toll free 800 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.
I. THE COST
In exchange for obtaining the right use the franchisor’s name and its assistance, you may pay some or all of the following fees.
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 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 the 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.
You may have to pay into the 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.
To ensure uniformity, franchisors typically control how franchisees conduct business. These controls may significantly restrict your ability to exercise your business judgment. The following are typical examples of such controls.
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 or services in each outlet. Some franchisors require periodic renovations or seasonal design changes. Complying with these standards may increase yours 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 automobile 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 Operations
Franchisors may require you to operate in a particular manner, 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 outlets 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 profitable location.
III. TERMINATION AND RENEWAL
You can lose the right to your franchise if you breach the franchise contract. In addition, the franchise contract is for a limited time; there is no guarantee that you will be able to renew it.
A franchisor can end your agreement if, for example, you fail to pay the royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.
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.
IV. BEFORE SELECTING A FRANCHISE SYSTEM
Before investing in a particular franchise system, carefully consider how much money you have to invest, your abilities and 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 auto 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 business?
• What are your goals?
• Do you require a specific level of annual income?
• Are you interested in pursuing a particular field?
• 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 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?
Selecting a Franchise
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.
Is there a demand for the franchisor’s products or services in your community? Is the demand seasonal? For example, lawn and garden care or swimming pool maintenance may be profitable only the spring or summer. Is there likely to be a continuing demand for the products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service generate repeat business?
What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the franchisor have in your area? How many competing companies sell the same or similar products or services? Are these competing companies well establishes, with wide name recognition in your community? Do they offer the same goods and services at the same or lower prices?
Your Ability To Operate A Business
Sometimes, franchise systems fail. Will you be able to operate your outlet even of the franchisor goes out of business? Will you need a franchisor’s ongoing training, advertising, or other assistance to succeed? Will you have access to the same or other suppliers? Could you conduct the business alone if you must lay off personnel to cut costs?
A primary reason for purchasing a franchise is the right to associate with the company’s name. The more recognized the name, the more likely it will draw customers to know its products or services. Therefore, before purchasing a franchise, consider:
• The company’s name and how widely recognized it is;
• If it has a registered trademark;
• How long the franchisor has been in operation;
• If the company has a reputation for a quality products or service; and
• If consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency.
Training and Support
Another reason for purchasing a franchise is to obtain support from the franchisor. What training and ongoing support does the franchisor provide? How does their training compare with the training for typical workers in the industry? Could you compete with others who have more formal training? What backgrounds do the current franchise owners have? Do they have prior technical backgrounds or special training that helps them succeed? Do you have a similar background?
Many franchisors operate well-established companies with years of experience both in selling goods or services and in managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. 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.
A growing franchise system increases the franchisor’s name recognition and may enable you to attract customers. Growth alone does not ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support activities. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.
Shopping At A Franchise Exposition
Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are not interested in. Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When you attend, comparison shop for the opportunity that best suits your needs and ask questions.
Know How Much You can Invest
An exhibitor may tell you how much you can afford to invest or that you can’t afford to pass up this opportunity. Before beginning to explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.
Know What Type of Business Is Right For You
An exhibitor may attempt to convince you that an opportunity is perfect for you. Only you can make the determination. Consider the industry that interests you before selecting a specific franchise system. Ask yourself the following questions: Have you considered working in that industry before? Can you see yourself engaged in that line of work for the next twenty years? Do you have the necessary background or skills? If the industry does not appeal to you or you are not suited to work in that industry, do not allow an exhibitor to convince you otherwise. Spend your time focusing on those industries that offer a more realistic opportunity.
Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitor’s presentations and discussions with other interested consumers. Get answers to the following questions: How long has the franchisor been in business? How many franchised outlets currently exist? Where are they located? How much is the initial franchise fee and any additional start-up costs? Are there any continuing royalty payments? How much? What management, technical and ongoing assistance does the franchisor offer? What controls does the franchisor impose?
Exhibitors may offer you prizes, free samples or free dinners if you attend a promotional meeting later that day over the next week to discuss the franchise in greater detail. Do not feel compelled t o attend. Rather, consider these meetings as one way to acquire more information and to ask additional questions. Be prepared to walk away from any promotion if the franchise does not suit your needs.
Get Substantiation For Any Earnings Representations
Some franchisors may tell you how much you earn if you invest in their franchise system or how current franchisees in their system are performing. Be careful. The FTC requires that franchisors who make such claims provide you with written substantiation. Make sure you ask for and obtain written substantiation for any income projections, or income or profit claims. If the franchisor does not have the required substantiation, or refuses to provide it to you, consider its claims to be suspect.
It may be difficult to remember each franchise exhibit. Bring a pad and a pen to take notes. Get promotional literature that you can review. Take the exhibitors’ business cards so you can contact them later with any additional questions.
Avoid High Pressure Sales Tactics
You may be told that the franchisor’s offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price. Do not feel pressured to make any commitment. Legitimate franchisors expect you to comparison shop and to investigate their offering. A good deal today should be available tomorrow.
Study The Franchisor’s Offering
Do not sign any contract or make any payment until you have the opportunity to investigate the franchisor’s offering thoroughly. As will be explained further in the next section, the FTC’s Franchise Rule requires the franchisor to provide you with a disclosure document containing important information about the franchise system. Study the disclosure agreement. Take time to speak with current and former franchisees about their experiences. Because investing in a franchise can entail a significant investment, you should have an attorney review the disclosure document and franchise contract and have an accountant review the company’s financial disclosures.
Investigating Franchise Offerings
Before investing in any franchise system, be sure to get a copy of the franchisor’s disclosure document. Sometimes this document is called a Franchise Offering Circular. Under the FTC’s Franchise Rule, you must receive the document at least 10 business days before you are asked to sign any contract or pay any money to the franchisor. You should read the entire disclosure agreement. Make sure you understand all the provisions. The following outline will help you to understand key provisions of typical disclosure documents. It also will help you ask questions about the disclosures. Get a clarification or answer to your concerns before you invest.
The disclosure document identifies the executives of the franchise system and describes their prior experience. Consider not only their general business background, but their experience in managing a franchise system. Also consider how long they have been with the company. Investing with an inexperienced franchisor may be riskier than investing with an experienced one.
The disclosure document helps you assess the background of the franchisor and its executives by requiring the disclosure of prior litigation. The disclosure documents tells you if the franchisor, or any of its executive officers, has been convicted of felonies involving, for example, fraud, any violation of franchise law or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also will tell you if the franchisor or any of its executives has been held liable or settled a civil action involving the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with the franchisor’s performance.
Note to the Editors: The FTC Consumer Guide to Buying A Franchise is included in IFA’s Franchise Opportunities Guide, a directory of hundreds of franchise companies that provides information to educate prospective franchisees. News media representatives may get a free copy of the guide by sending a request on company letterhead or by contacting IFA Media Relations at 202-628-8000. Visit the associations Web site at www.franchise.org to view the IFA’s Franchise Opportunities Guide Online.
News Media Contact: Laura FENWICK or TERRY HILL, 628-8000
Buying a franchise is investing in your future. Because the International Franchise Association wants tomorrow’s business owners to make educated decisions about their futures, it is providing the following information from the Federal Trade Commission’s (FTC) “Consumer Guide To Buying A Franchise.” IFA recommends enlisting the help of an attorney, business consultant and accountant when investigating franchise systems before investing. For this and other information about franchising, visit IFA’s Web site at www.franchise.org.
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