Starting a business from scratch is difficult. You have to figure everything out on your own and in the process you inevitability make mistakes. Some of them costly. Some of them just frustrating. Hopefully, none results in the loss of your business, but there is an inherent level of risk involved.
Buying a franchise minimizes the risk of getting started in business. A franchise operation is in many respects a business in a box. It comes with a set of instructions so to speak, including customized training and on-going support. Whether it’s accounting and financing, advertising and public relations, personnel management, purchasing, or inventory control, the franchise organization is there to assist you and help you succeed. As a franchisee you are in business for yourself, but not by yourself. In return for this assistance, you’ll typically pay an initial fee and on-going royalties to the franchise organization.
While there are many excellent franchise opportunities available today, you shouldn’t be lulled into a false sense of security. Just as with any business opportunity you need to do your homework and make sure you make a good personal choice as well as a smart financial decision.
First, if you are an individual with a strong sense of entrepreneurism – in other words you like to do things your way – then a franchise may not be a good fit for you. In order to protect its brand and maintain consistency, the franchise organization expects its franchisees to do business their way. If you don’t follow their system, depending on the terms of your contract, you run the risk of losing your franchise.
Secondly, make sure you investment in a solid franchise operation. If you are seriously considering the purchase of a franchise, the FTC (Federal Trade Commission) requires the franchise organization to give you a document called the Uniform Franchise Offering Circular (UFOC). This is known as the Franchise Rule. In the document, you’ll find detailed information about the franchising company including financial statements, past or pending litigation, bankruptcies and a list of existing franchises. Ask lots of questions. Secure professional advice to review the document with you. And by all means talk to existing franchisees.
In addition to the normal due diligence, make sure the franchise you are considering is a good fit for your particular area. Some types of franchises do well on the West Coast, but aren’t as successful in the north or east. Also, think about the nature of the product or service. Do you think it has long-term appeal or could it be a trend or a fad? You want to make sure your investment doesn’t fizzle out because something loses its popularity.
Find out what is expected of you other than your financial commitment. For example, what type of experience is required? Some franchises don’t expect you to have any experience in the industry, but they may require you spend a considerable amount of time in training learning their system. Think of McDonald’s and its famous Hamburger University.
Also, you need to know what kind of work hours and personal commitment will be expected of you to run the franchise successfully. One franchise organization I consulted with many years ago, required their franchisees to be owner/operators. In other words, the buyer of the franchise needed to be at the location most of the time. That may not be a good fit for your lifestyle.
If you are interested in buying a franchise, both the FTC and the International Franchise Association have many helpful publications and resources. Of course, as always, make sure you get sound, expert advice from business advisors such as an attorney who specializes in franchise law.
Related Material:
Top Ten Franchise Organizations (From Entrepreneur Magazine, Jan. 2009)
- Subway
- McDonald's
- Liberty Tax Service
- Sonic Drive In Restaurants
- InterContinental Hotels Group
- Ace Hardware Corp.
- Pizza Hut
- UPS Store, The/Mail Boxes Etc.
- Circle K
- Papa John’s International, Inc.
Top Ten Questions To Ask Before You Buy a Franchise:
- Am I cut out to be a franchisee?
- What experience do I need in the industry?
- What personal commitment is required?
- What financial commitment is required? (initial and on-going)
- What type of training and on-going support will be provided?
- What is the track record of the franchisor?
- What is the current financial condition of the franchisor?
- Can you speak with other franchisees? (get a substantial list)
- Are there expansion plans? If so how can you protect your investment from internal competitors?
- When or how can the franchise be terminated?
| 