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By Valerie S. Johnson
You’ve always wanted to have your own McDonald’s. Or own another successful business. Buying a franchise sounds like a good idea. Someone else has already figured out the business model and you just put up the cash, right? Like anything else, making money is never that simple. Here are ten things to consider before you invest to become a franchisee.
1. Do you Love the Business? You must be convinced that you will dig flipping burgers, cleaning houses, preparing taxes, or whatever the franchised business is. You will live and breath that business 24/7. It’s not enough to think it’s going to be a good money maker. You will have to learn all aspects of the industry and truly enjoy the principal business. Without that entrepreneurial passion, you are doomed to fail.
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2. Do you have a Chunk of Change? All franchise investments require a sizable initial fee. Are you willing to bet the farm? Do you have the resources to pay your household bills until you start making money from the business? For how long? There is no guarantee of success in any business, no matter what the slick franchise salesperson tells you. You may also have to invest in real estate, renovations, inventory, insurance, and licenses. And it doesn’t end there. You may be required to contribute to advertising costs and to pay ongoing royalties, even if your sales fall below expectations.
3. Are You Willing to Work Long Hours? Owning a franchise is not living on Easy Street. You will be responsible for business details such as accounting, bookkeeping, attracting and keeping customers, complying with Federal, state, and local laws and regulations, employing and supervising personnel, dealing with complaints, and reporting to the owner of the franchise (the "franchisor").
4. Have you Researched the Franchisor? How long have they been in business? Are the executives experienced? Is the brand name well known and respected? Will you get a license to use the trademark? Have any complaints been filed against the franchiser with the Better Business Bureau or any State attorney general?
5. Have you Consulted with a Lawyer and an Accountant? The Federal Trade Commission requires franchisors to give you a large, complex disclosure document (usually called a Uniform Franchise Offering Circular or UFOC) before you pay any money or sign papers. You need skilled franchise advisors to review all the documents, especially the contract and the financial statements.
6. Have you Interviewed other Franchisees? The disclosure document will list contact locations of other franchisees. It is very important to visit them in person and talk to the owners. Have they been happy with the amount of training and support they receive? How are they doing financially?
7. How Much Training will the Franchiser Provide? This is especially critical if you are new to the particular type of franchised business.
8. Do you Understand the Restrictions? Because you are essentially paying to use a brand name that someone else spent time, money, and effort to build, you are required to give up a significant amount of control over your business. Most franchisers require strict adherence to their specifications. You may need prior approval of your proposed location. You can’t wear a different type of uniform because you think it looks better, and you can’t make the Golden Arches a different shade of yellow. Your sales territory may be restricted and your hours of operation may not be flexible.
9. Are Your Expectations Realistic? In an effort to sell you a business, some franchisors may emphasize how much you can earn or how well their other franchisees are doing. Make sure that you get written substantiation of any of these claims. Have you thoroughly researched the competition?
10. What’s Your Exit Strategy? Buying a franchise is not a short-term venture. The franchise agreement you sign will commit you for the long haul – typically 15 to 20 years. There is no guarantee that the franchisor will renew it on the same terms, or at all. If you breach the franchise agreement, the franchisor may terminate it earlier, and you may lose your initial investment.
A franchise can be a fabulous opportunity – for the right person, at the right time, in the right business. For more information, read the Federal Trade Commission’s publication <a href="http://www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm">Consumer Guide to Buying a Franchise</a>. Information is also available at http://www.franchise.com and http://www.franchise.org.
You’ve always wanted to have your own McDonald’s. Or own another successful business. Buying a franchise sounds like a good idea. Someone else has already figured out the business model and you just put up the cash, right? Like anything else, making money is never that simple. Here are ten things to consider before you invest to become a franchisee.
1. Do you Love the Business? You must be convinced that you will dig flipping burgers, cleaning houses, preparing taxes, or whatever the franchised business is. You will live and breath that business 24/7. It’s not enough to think it’s going to be a good money maker. You will have to learn all aspects of the industry and truly enjoy the principal business. Without that entrepreneurial passion, you are doomed to fail.
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2. Do you have a Chunk of Change? All franchise investments require a sizable initial fee. Are you willing to bet the farm? Do you have the resources to pay your household bills until you start making money from the business? For how long? There is no guarantee of success in any business, no matter what the slick franchise salesperson tells you. You may also have to invest in real estate, renovations, inventory, insurance, and licenses. And it doesn’t end there. You may be required to contribute to advertising costs and to pay ongoing royalties, even if your sales fall below expectations.
3. Are You Willing to Work Long Hours? Owning a franchise is not living on Easy Street. You will be responsible for business details such as accounting, bookkeeping, attracting and keeping customers, complying with Federal, state, and local laws and regulations, employing and supervising personnel, dealing with complaints, and reporting to the owner of the franchise (the "franchisor").
4. Have you Researched the Franchisor? How long have they been in business? Are the executives experienced? Is the brand name well known and respected? Will you get a license to use the trademark? Have any complaints been filed against the franchiser with the Better Business Bureau or any State attorney general?
5. Have you Consulted with a Lawyer and an Accountant? The Federal Trade Commission requires franchisors to give you a large, complex disclosure document (usually called a Uniform Franchise Offering Circular or UFOC) before you pay any money or sign papers. You need skilled franchise advisors to review all the documents, especially the contract and the financial statements.
6. Have you Interviewed other Franchisees? The disclosure document will list contact locations of other franchisees. It is very important to visit them in person and talk to the owners. Have they been happy with the amount of training and support they receive? How are they doing financially?
7. How Much Training will the Franchiser Provide? This is especially critical if you are new to the particular type of franchised business.
8. Do you Understand the Restrictions? Because you are essentially paying to use a brand name that someone else spent time, money, and effort to build, you are required to give up a significant amount of control over your business. Most franchisers require strict adherence to their specifications. You may need prior approval of your proposed location. You can’t wear a different type of uniform because you think it looks better, and you can’t make the Golden Arches a different shade of yellow. Your sales territory may be restricted and your hours of operation may not be flexible.
9. Are Your Expectations Realistic? In an effort to sell you a business, some franchisors may emphasize how much you can earn or how well their other franchisees are doing. Make sure that you get written substantiation of any of these claims. Have you thoroughly researched the competition?
10. What’s Your Exit Strategy? Buying a franchise is not a short-term venture. The franchise agreement you sign will commit you for the long haul – typically 15 to 20 years. There is no guarantee that the franchisor will renew it on the same terms, or at all. If you breach the franchise agreement, the franchisor may terminate it earlier, and you may lose your initial investment.
A franchise can be a fabulous opportunity – for the right person, at the right time, in the right business. For more information, read the Federal Trade Commission’s publication <a href="http://www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm">Consumer Guide to Buying a Franchise</a>. Information is also available at http://www.franchise.com and http://www.franchise.org.