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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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