Buying A Franchise:
A Consumer Guide

When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: there’s no guarantee of success.

This article explains how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.

I. The Benefits and Responsibilities of Franchise Ownership

II. Advance Work: Before You Select a Franchise System

III. Selecting a Franchise

IV. Finding the Right Opportunity

V. Investigating Before You Invest

VI. Before You Sign the Franchise Agreement

I. The Benefits and Responsibilities of Franchise Ownership

A franchise enables you, the investor or franchisee, to operate a business. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisor’s name for a limited time, and assistance. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing, or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars.

Buying a franchise may reduce your investment risk by enabling you to associate with an established company. But the franchise fee can be substantial. You also will have other costs: for example, you may be required to give up significant control over your business while you take on contractual obligations with the franchisor.

Typically, franchise systems have several components.

Costs

In exchange for the right to use the franchisor’s name and assistance, you will pay some or all of the following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which will range from several thousand dollars to several hundred thousand dollars, may be non-refundable. You may incur significant costs to rent, build, and equip an outlet and to buy initial inventory. You also may have to pay for operating licenses and insurance, and 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 a percentage of your weekly or monthly gross income. Often, you must pay royalties even if your outlet isn’t earning significant income. As a rule, you have to pay royalties for the right to use the franchisor’s name. Even if the franchisor doesn’t provide the services they promised, you still may have to pay royalties for the duration of your franchise agreement. Indeed, even if you voluntarily terminate your franchisee agreement early, you may owe royalties for the remainder of your agreement.

Advertising Fees

You also may have to pay into an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your particular outlet.

Controls

To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. Here are a few examples.

Site Approval

Many franchisors pre-approve sites for outlets, which, in turn, may increase the likelihood that your outlet will attract customers. At the same time, the franchisor may not approve the site you’ve selected.

Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure a uniform look among the various outlets. Some franchisors require periodic renovations or seasonal design changes; complying with these standards may increase your costs.

Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a particular way: they may dictate hours; pre-approve signs, employee uniforms, and advertisements; or demand that you use certain accounting or bookkeeping procedures. In some cases, the franchisor may require that you sell goods or services at specific prices, restricting your ability to offer discounts, or that you buy supplies only from an approved supplier even if you can buy similar goods elsewhere for less.

Restrictions on Sales Area

A franchisor may limit your business to a specific territory.While territorial restrictions may ensure that you will not compete with other franchisees for the same customers, they also could hurt your ability to open additional outlets or to move to a more profitable location. In addition, a franchisor may limit your ability to have your own website, which could restrict your ability to have online customers. Moreover, the franchisor itself may have the right to offer goods or services in your sales area through its own website or through catalogs or telemarketing campaigns.

Terminations and renewal

You can lose the right to your franchise if you breach the franchise contract. Franchise contracts are for a limited time; your right to renew is not guaranteed.

Franchise Terminations

A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.

Renewals

Franchise agreements may run for as long as 20 years. At the end of the contract, the franchisor may decline to renew. Renewals are not automatic, and they may not have the original terms and conditions. Indeed, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in more competition from company-owned outlets or other franchisees.

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II. Advance Work:
Before You Select a Franchise System

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

Your Investment

• How much money do you have to invest?
  
  
• How much money can you afford to lose?
  
  
• Are you purchasing the franchise alone or with partners?
  
  
• Do you need financing? Where’s it coming from?
  
  
• What’s your credit rating? Credit score?
  
  
• Do you have savings or additional income to live
  on while you start your business?

Your Abilities

• Does the franchise require technical experience or special training or education (for example, auto repair, home and office decorating, or tax preparation)?
  
  
• What special skill set can you bring to a business, and, specifically, to this business?
  
  
• What experience do you have as a business owner or manager?

Your Goals

Write down your reasons for buying a particular franchise:

• Do you need a specific annual income?
  
  
• Are you interested in pursuing a particular field?
  
  
• Are you interested in retail sales or performing a service?
  
  
• How many hours can you work?
  How many are you willing to work?
  
  
• Do you intend to operate the business
  yourself or hire a manager?
  
  
• Will franchise ownership be your primary source of income
  or a supplement to your current income?
  
  
• Do you get bored easily? Are you in this for the long-term?
  
  
• Would you like to own several outlets?

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