Buying A Franchise:
A Consumer Guide
... Continued From Previous Page
III. Selecting a Franchise
Purchasing a franchise is like any other investment: it
comes with risk. When you think about a particular
franchise, think about the demand for the products
or services it offers, competitors that offer similar
products or services, the franchisor’s background,
and the level of support you will receive.
Demand
Is there a demand for the franchisor’s products or
services in your community? Is it seasonal or ever-
green? Could you be dealing with a fad? Does the
product or service generate repeat business?
Competition
What’s the level of competition—nationally,
regionally, and locally? How many franchised and
company-owned outlets are in your area? Does
the franchise sell products or services that are
easily available online or through a catalog? How
many competing companies sell similar products
or services? Are they well-established or widely
recognized by name in your community? Do they
offer a similar product at a similar price?
Your Ability to Operate the Business
Sometimes, franchise systems fail. What will happen
to your business if the franchisor closes up shop?
Will you need the franchisor’s ongoing training,
advertising, or other help to succeed? Will you have
access to the same suppliers? Could you conduct
the business alone if you have to cut costs or lay
anyone off?
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.
Name Recognition
Buying a franchise gives you the right to associate
with the company’s name or brand. The more widely
recognized the name, the more likely it is to draw in
customers.
Consider:
- name and brand recognition for the company
and
its product or service
- whether the company has a registered trademark
- how long the franchisor has been in business
- whether the company’s reputation is for quality
products or services
- whether consumers have filed complaints against
the franchise with the Better Business Bureau or a
local consumer protection agency
Training and Support Services
What training and continuing support does the
franchisor provide? Does the franchisor’s training
measure up to the training for workers in the
particular industry? Can you compete with others
who have more formal training? What backgrounds
do the current franchise owners have? Is your
education, experience, or training similar?
Franchisor’s Experience
Many franchisors operate well-established companies
with years of experience both in selling goods or
services and 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. Find out:
- how long the franchisor has managed a franchise
system
- whether the franchisor has enough expertise to
make you feel comfortable. If the franchisor has
little experience managing a chain of franchises, take
any promises about guidance, training, and other
support with the proverbial grain of salt.
Growth
A growing franchise system increases the franchisor’s
name and brand recognition and may enable you to
attract customers. But growth alone doesn’t ensure
successful franchisees. Indeed, a company that grows
too quickly may not be able to support its franchisees
with the support services it promises them. Investigate
the franchisor’s financial assets and resources; are they
sufficient to support the franchisees?
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IV. Finding The Right Opportunity
There are many, many ways to find franchise
opportunities. Some franchisors have websites
with information about their franchises. Franchise
expositions are another good source of information,
as are franchise brokers—companies or people that
specialize in matching individuals with franchise
companies. It’s always a good idea to visit franchised
outlets in your area and talk to the owners about their
experience with particular franchisors.
Shopping at a Franchise Exposition
Attending a franchise exposition allows you to see and
compare a variety of franchise possibilities under one
roof. Before you attend, research the kind of franchise
that may best suit your budget, experience, and goals.
When you attend, visit several franchise exhibitors who
deal with the type of industry that appeals to you.
Ask questions.
- How long has the franchisor been in business?
- How many franchised outlets exist? Where are
they?
- What is the initial franchise fee? What additional
start-up costs can you expect? Are there
continuing royalty payments? How much? What
do other franchisees pay?
- What management, technical, and other support
does the franchisor offer?
- What controls does the franchisor impose?
Exhibitors may offer you incentives to attend a
promotional meeting to discuss the franchise in
greater detail. These meetings can be another
source of information and another opportunity to
raise questions. Be prepared to walk away from
any franchise opportunity—and promotion—that
doesn’t fit your needs.
Using a Franchise Broker
Franchise brokers—who also refer to themselves as
“business coaches,”“advisors,”“referral sources,” or
“sales consultants”—help people who want to buy a
franchise. They often advertise on the Internet and
in business magazines that they will help you select
among various franchise options.Typically, a broker
reviews the amount of money you have to invest
and then directs you to opportunities that match
your interests and resources.A broker also may
help you complete applications and the paperwork
to consummate the sale. Remember that franchise
brokers often work for franchisors, and get paid only
if a sale is completed.
Limited Opportunities
Some franchise brokers may claim to be able to
match you with “the perfect opportunity” because
they represent a wide range of business sellers. That
may be true—or not. In some instances, franchise
brokers represent only a few franchisors, and, as a
result, their suggestions may be limited.
Selection Standards
Some franchise brokers may claim that they will
suggest only those franchises that meet certain
standards. You may think this means that your
financial risk is limited because the broker is weeding
out the poor investments. In fact, some brokers
represent any franchisor willing to pay them a
commission for a sale. If you rely on a broker, be
skeptical: you may be directed to a franchise that is
failing or that doesn’t have a track record.
Upselling
Some brokers earn a flat fee regardless of the price
of the franchise they sell; others earn a commission
pegged to the price of the franchise the broker
sells. The more costly the franchise, the bigger the
broker’s commission. Some brokers may steer you
toward a more costly franchise to beef up their own
commission.
Unauthorized or Misleading
Earnings
Representations
To convince you to buy a particular franchise, a
broker may make certain representations about
income. Earnings claims may not be true, and
sometimes, can be misleading even if literally true.
For example, the figures may be based on earnings
in an area where demand for the business’ goods or
services is high. Or the earnings claimed may be
based on outdated industry data. In some instances,
earnings claims may be gross sales figures: when
you factor in likely expenses, actual earnings can be
far less. Because earnings representations may be
misleading, many franchisors prohibit their sales
representatives from making them.
Before using a franchise broker, ask yourself:
- whether you need the services of a franchise
broker. Can you get enough information
shopping online or reading trade magazines?
- whether the broker is paid by the franchisor. Are
there any fees you must pay the broker? If so,
how much you are willing to pay?
- whether the broker’s commission depends on
the price of the franchise. If it does, consider the
fact that the broker may be leading you toward a
higher-priced franchise. Ask about alternatives in
the same field that may cost less.
- how many franchisors the broker represents. If
it’s a small group, the potential match-ups may be
limited.
- how the broker selects franchisors to represent.
Are the selection criteria in writing? Ask to see
them. How many franchisors has the broker
turned down in the recent past?
- about potential earnings claims. Verify whether
the franchisor has authorized the claims. Ask the
franchisor for the written documentation that
lays out the basis for the claims. Think about
consulting an accountant to determine whether
the claims are reasonable and if they are applicable
to where and how you intend to operate your
business.
You should receive the names and contact
information for other buyers of the franchise—
current and former franchisees. Talk to them, rather
than relying on information from the broker alone.
Speak to them about their experience within the franchisor.
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