Buying A Franchise:
A Consumer Guide
... Continued From Previous Page
Advertising
This section has information on advertising costs.
Franchisees often are required to contribute a
percentage of their income to an advertising fund.
Find out:
- what part of the advertising fund is devoted
to
administrative costs
- what other expenses are paid from the advertising
fund
- whether franchisees have any control over how the
advertising dollars are spent
- what advertising promotions the company has
already engaged in and what’s on the drawing
board
- what percentage of the fund is spent on national
advertising
- what percentage of the fund is spent on
advertising in your area
- what percentage is devoted to selling more
franchises
- whether all franchisees contribute equally to
the
advertising fund
- whether you need the franchisor’s consent to
develop and buy your own advertising
- whether there are rebates or advertising
contribution discounts if you do your own
advertising
- whether the franchisor gets any commissions or
rebates when it places advertisements, and who
benefits from those—you or the franchisor
Current and Former Franchisees
This section has very important information about
current and former franchisees. Many franchisees
in your area may mean more competition for
customers. The number of terminated, cancelled,
or non-renewed franchises may indicate problems.
Some companies may repurchase failed outlets and list them as company-owned outlets.
Look for contact information for current franchisees
and franchisees who have left the system within the
last year; talking to them may be the most reliable
way for you to verify the franchisor’s claims. Visit or
phone as many of the current and former franchisees
as possible to chat about their experiences, and the
volume and type of business they’re doing. Note
that some of them may have signed confidentiality
agreements that prevent them from speaking with
you. If that’s the case, try contacting others on the
list.
If you buy an existing outlet that was reacquired
by the franchisor, the franchisor must tell you who
owned and operated the outlet for the last five years.
Several owners in a short time may indicate that
the location isn’t profitable or that the franchisor
hasn’t supported that outlet as promised. Consider
contacting several previous owners to learn more
about their experience operating the particular outlet.
You will want to learn:
- how long the franchisee operated the franchise
- where the franchise was located
- whether they were able to open the outlet in a
reasonable time
- their total investment, including any hidden or
unexpected costs
- how long it took them to cover operating costs
and earn a reasonable income
- whether they were satisfied with the cost, delivery,
and quality of the goods or services they sold
- their backgrounds before becoming a franchisee
- If you have doubts about whether the training offered is
sufficient to give you the tools you need to handle day-to-day business operations, consider another
franchise opportunity.
- whether the franchisor’s training was adequate
- whether the franchisor provided ongoing help
- their satisfaction with the franchisor’s advertising
program
- whether the franchisor fulfilled its contractual
obligations
- whether the franchisee would invest in another
outlet
- whether the franchisee would recommend the
investment
Some franchisors may give you a separate reference
list of franchisees to contact. To ensure that you
get the full picture, you may want to contact at least
some references listed in the disclosure document
that are not on the separate list.
Associations of Franchisees Operating
Similar Outlets
There’s no question that the disclosure document
is critical reading for potential franchisees.
Associations of franchisees who are operating similar
outlets are another important source of information.
Whether or not these associations are sponsored
or endorsed by the franchisor, they can provide
information about the state of the relationship
between the franchisor and its franchisees. You may
want to ask a franchisee association about:
- its membership
- its history
- its goals
- its relationship with the franchisor
- any benefits in buying from one franchisor versus
a competitor
- any problems franchisees are facing in the
operation
of their outlets
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