Factors to Consider When Choosing a Franchise to Buy
by Rebecca Button on December 24th, 2007
When you want to go into business for yourself, but aren’t quite sure you want to start from scratch and you can’t find an existing business that fits what you’re looking for, you might consider franchise ownership.
Purchasing a franchise involves paying an initial fee and then a percentage of profits to a franchisor. In return for your investment, you gain the use of the company’s trademark, ongoing support from the franchisor and the use the franchisor’s systems and methods of doing business including logistics, purchasing power, IT systems, and more.
Buying a franchise has several advantages over starting a business from scratch. You are buying a proven system of operation and will get training in how to use it.
Advantages of Buying a Franchise
* You are buying turnkey operation, a plug and play business
* Standardized products and systems come with the franchise
* Most franchises have standardized financial and accounting systems
* Collective buying power with all the franchisees pooling together
* Training and consulting available
* National and local advertising programs
* Most franchise corporations have ongoing research and development
* Financial assistance is available through some franchises
* You will be provided an operations manual
* Sales and marketing assistance come with your franchise fee and may include some advertising as well
Franchising is not for everyone. If you have an independent spirit and do not like to be told what to do, be careful of entering into a franchise. If you like to create and color outside the lines, a franchise may not be a good fit for you, so really check out operating policies and procedures to see what freedoms you are afforded in running your business.
Things to be aware of when buying a franchise
* Loss of control – you will need to do things as the franchise indicates
* You are entering into a binding contract
* The franchisor’s problems become your problems
Franchises are designed to help people who are new to business set up shop and run a business, and it can be very exciting. Don’t let your emotions dictate your decisions, factor the positives and negatives and make a good assessment of the best decision for you based on your situation.
Purchasing a franchise can cost as little as $3,000 and as much as $50,000, depending on the business type. There also is usually an ongoing charge or percentage of the profits, known as a royalty fee. These are variable and the amount will depend on the franchise ownership. These costs are in addition to the many other business costs you will have such as:
* Facility/Location
* Equipment
* Signs
* Opening Inventory
* Working Capital
* Advertising Fees
According to the FTC’s Franchise Rule, put into effect October 21, 1979, franchisors are required to provide a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to purchase the franchise. The timeline for the disclosure is the first personal contact and must end at least 10 days prior to any money changing hands.
The purpose of the rule is to have a cooling off period so the buyer has time to rationally think about the options before them without any high pressure sales tactics. You can visit the FTC’s Franchise and Business website to find out more about the Franchise Rule.
Franchises can be a very rewarding purchase and an excellent investment if you are of the right personality and purchase the right type of franchise. As always, make sure you consult with your accountant and attorney prior to entering into any agreements regarding your business.