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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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