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Consumer Guide To Buying a Franchise

Many people dream of being an entrepreneur. Your dreams of owning a small business can come true by purchasing a franchise. With a franchise business model, you can sell goods and services with instant brand recognition. Buying a franchise is not a guarantee you will succeed.

This FindLaw article helps you decide if being a franchise business owner is worth the initial investment and ongoing royalties.

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Benefits and Responsibilities of Franchise Ownership

To help you evaluate whether owning a franchise is right for you, know the legal advantages and disadvantages of owning a franchise. It will help you understand your obligations as a franchise owner, how to shop for franchise opportunities, and how to ask the right questions before you invest.

An investor in a franchise is the "franchisee." The franchise company is an existing business called the "franchisor." Investing in a franchise allows that person to operate a business. Before running a franchise, the investor must pay a franchise fee. Fees start at several thousand dollars. It allows the franchisee to receive:

  • Franchisor help and assistance
  • Protocols, systems, and procedures created by the franchisor
  • The right to use the franchisor's name for a limited time

Buying a franchise reduces investment risk since you are associated with an established company. However, it is costly. You relinquish significant control over your business. You also take on contractual obligations with the franchisor.

Costs of Investing In a Franchise

A franchise disclosure document (FDD) will show you your anticipated startup costs, franchise fees, and royalty fees. A business plan helps you determine your customer base and how to get funding for your business. Selling a new franchise may have lower start-up costs than if you select an existing franchise.

Guide To Selecting a Franchise System

There are more than a few things to consider when you pick your franchise. Follow this checklist to ensure you have answered them all satisfactorily before signing a franchise agreement.

Determine Your Goals

Before you can find the right franchise for your own business, you need to know your reason for wanting a franchise business. Here is a list of questions to consider:

  • Do you meet annual income requirements?
  • What type of business do you want to buy?
  • Are there any industries you like more than others?
  • Would you rather sell a product or a service?
  • Are you able to hire a team of employees and managers?
  • Do you want to manage the new franchise yourself?
  • Is your business meant to supplement your income or be full-time?
  • Do you want to expand to other locations?

Once you've answered these questions, you can begin selecting a franchise.

Selecting a Franchise

Like any business, franchising can be risky. When selecting a franchise, carefully consider several factors:

  • Competition
  • Existing franchisee complaint history
  • Franchisor's background
  • Franchisee support

Don't gloss over the following checklist and questions.

Demand

Do market research and see if there is demand for this kind of business where you live.

  • Is there a demand for the franchise in your community?
  • Will the demand last all year round, or is it seasonal?
  • Is the franchise's demand temporary or a fad?
  • Can the franchise service or product bring customers back?

When there's no demand, you may want to find another type of business or franchise location.

Competition

Consider the national, regional, and local competition when picking your franchise startup.

  • How many company-owned locations are near you?
  • How many other franchise locations are in your area?
  • Are there other stores that sell the same products near you?
  • How well-established and well-known is the competition in your community?
  • What is your competitor's pricing?

If there's a lot of competition in your industry, pick a franchise that stands out.

Your Ability To Operate the Business

Sometimes, franchise systems fail.

  • How dependent on the franchisor are you? Do you require their systems and procedures to succeed?
  • Do you have to sign a lease?
  • Will you have to buy real estate?
  • Have you ever run a business before?
  • Have you ever managed a business for someone else before?
  • Is your access to suppliers limited?
  • If you had to fire employees to reduce costs, could you operate the business without the franchisor's help?
  • Would you need any special education or training to run the business?
  • What special skills do you have?
  • Do you have any professional skills like bookkeeping?

Do not let an exhibitor or salesperson convince you to invest in a franchise or industry that doesn't appeal to you. Focus your time on what does interest you. Be realistic about how you will spend your time.

Name Recognition

The right to associate with the company's name is a primary reason for purchasing a franchise. A fast-food restaurant like McDonald's has instant name recognition. A new business called Cheeseburger USA would not. So, before purchasing a franchise, consider:

  • What is the brand recognition for the company?
  • Do people know the company's brand, logo, or name?
  • Does the franchise have a registered trademark?
  • How long has the franchisor been in operation?
  • What is the company's reputation for quality products or services?
  • Have customers filed complaints with the Better Business Bureau?
  • Have customers filed complaints with local or regional consumer protection agencies?
  • How are Facebook, Yelp, and other social media reviews?

The more well-recognized the name, the more likely clients will come to your business.

Training and Support Services

A large benefit of purchasing a franchise is the support you get from the main company.

  • What background do other franchise owners have?
  • Does the franchisor provide initial training?
  • Is there ongoing training?
  • During your business operations, will the franchisor support you if you have questions?
  • How does their training compare with the training for typical workers in the industry?
  • Will the company's training allow you to compete with other owners or managers with formal education or training?

When searching for a franchise to invest in, get the answers to these questions.

Franchisor's Experience

Some franchises start when a successful entrepreneur expands their business model. They offer their experience selling goods or services to others in a packaged system. Other franchises start when a well-established company expands into a new venture. Regardless of why the business started, there's never a guarantee that you will be as successful.

If the head franchisor has little experience managing a chain of franchises, then their promises of guidance, training, and other support may be unreliable.

Growth

A growing franchise system increases the franchisor's name recognition. Growth alone does not mean your business will succeed. Sometimes, a franchisor can grow too fast. Their attention and procedures could be spread too thin. They may be unable to support its franchisees with all the promised support services. Ensure the franchisor has sufficient financial assets and staff to support the franchisees.

Shopping at a Franchise Exposition

Attending a franchise exposition (franchise expo) allows you to shop franchises in one spot. You can research and compare multiple franchises at once, sometimes even talking to the owners. Be aware that most franchises at these expos are trying to make sales. The salespeople want you to buy into their franchise systems.

Comparison Shop

Research several franchise exhibitors. Pay attention to franchises in the type of industry that interests you.

Get answers to the following questions:

  • How many franchise outlets exist nationally and locally?
  • How long has the franchise system been in place?
  • What are the initial franchise fees?
  • Is there an estimate for average start-up costs?
  • What are the royalty payments?
  • What controls does the franchisor impose?

Exhibitors or salespeople will try to get you to sign up with their system at an expo. If you attend a meeting, there could be samples, gifts, prizes, or dinners. Don't feel like you need to accept. These meetings are one way to gather information and ask more questions. Be prepared to reject any promotion if the franchise does not suit your needs.

Get Proof for Any Earnings Representations

The Federal Trade Commission (FTC) requires franchisors who tell you what you can make with their system to follow certain rules. If a salesperson tells you this, they must provide written substantiation (proof). Ask for proof of written substantiation for any income projections, including any income or profit claims and financial statements.

If the franchisor does not have the proof or refuses to provide it, consider this a red flag not to invest.

Avoid High-Pressure Sales Tactics

Don't feel pressured to commit when picking a franchise business model. Legitimate franchisors expect you to comparison shop and investigate their offering. A good deal today should be available tomorrow.

Talk With a Franchise Lawyer

Before investing in a particular franchise system or signing a franchise agreement, carefully consider how much money you have to invest, your abilities, and your goals. Then, talk to a franchise lawyer to review any of the franchise system options you've chosen to begin your small business journey.

Helpful Franchise Business Links

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