Tom

A: First let me say that as a general rule, I like franchising as a business concept (and write for the Franchise Handbook.) The pros of buying a franchise are self-evident:

• There should be less risk – ideally, the business model has been vetted and there is a successful system in place that you can follow.
• There is support – a great franchisor will help you all along the way. As Ray Kroc, the founder of McDonalds and inventor of franchising said, “in business for yourself but not by yourself .”
• There is a plan – entrepreneurs who start from scratch have to figure everything out for themselves; franchisees do not.

That said, not all franchises are created equal. You simply must do your due diligence to make sure that you are buying into a system and franchise that has a high likelihood of success and profitability.

Here then are the 3 most important things any potential franchisees needs to check out:

1. What do current franchisees say? When you meet with the franchisor, they will indeed paint a rosy picture, and that is understandable: It is their business, they believe in it, and want you to buy into it.

You will learn plenty more by speaking with current and past franchisees. These folks will give you the lowdown:

• What is the franchisor like to work with?
• How much money can you expect to make?
• What sorts of hours can you expect to put in?
• What should you be on the lookout for?

It is current franchisees (and any former ones if you can find some) who can best impart this invaluable type of info.

2. How much will it cost and how much will you make ? When you meet with the franchisor you will receive their Uniform Franchise Offering Circular (UFOC.) This legally-mandated document will relate such important things as expected startup costs, the company’s litigation history, ongoing fees, and so on.

What it probably will not tell you is how much you can expect to make. The reason is because they don’t want to open themselves up to potential litigation if you don’t make as much. So again, this is where doing your homework is essential.

Many people get bit by the franchising bug and cannot wait to jump in, so sure are they that they will make a bundle. Beware of this false euphoria.

Yes, you may make a bundle, and plenty of people have, but remember – you are going into business so act like a businessperson. Crunch some numbers. Do your research. Rely on facts, not emotion.

3. What is in the fine print ? Things you may never think are important can turn out to be incredibly so:

• What about exclusivity ? You probably want to make sure that you are given the right to own the only franchise of this type in your area. You sure do not want another one of the same ice cream shops as yours opening up down the street!
• Who will be your supplier? Some franchisors mandate that you buy your supplies directly from them. If so, make sure the prices are reasonable.
• What sort of ongoing fees will you be required to pay? Whether it is a monthly royalty payment or regular advertising fees, you will be making ongoing monthly payments to the franchisor. How much are they?

The bottom line is that you have to find a franchise that realistically affords you the chance to make a profit and have some fun. Be savvy, make an informed decision, and you will probably be very happy.

Today’s Tip : Here is a SCORE Tip for potential franchisees:

“You will probably want to have an attorney review the UFOC, but it is crucial that you understand every statement in each of the 23 parts:

• Items 1 through 4 – describe the franchisor, his background, business ethics and possible bankruptcy history.
• Items 5 through 10 – deal with the fees, royalties, advertising fees and all financial arrangements including restrictions as to sources of products and services.
• Items 11 through 19 – detail the franchisee’s obligations and provisions in the agreement. These are very important as they define what restrictions there are on products that can be sold, transfer assignments, terminations, dispute resolutions and the like.
• Items 20 through 23 – provide a list of existing franchisees, both active and those who have left the system. They also provide financial statements of the franchisor and copies of contracts used in connection with the franchise offering, including the Franchise Agreement.”

There have been many owners of failed franchises who have sued their franchiser – and won. The reason for their store or restaurant’s demise may have been because a franchiser over-stated earnings or under-stated costs. Or perhaps, little or no help was given in training, or there was little or no on-going support. These are all things that are inevitably crucial to a franchise’s success. If you believe that you may be a victim of "franchiser embellishment abandonment", you may have grounds for a lawsuit.

Steps to take when you believe your franchise failed
because of the fault of the franchiser:

Step 1: Seek out an attorney. You can find a list of franchisee-specific attorneys on the American Franchisee Association’s website, as well as helpful information on franchisee and small business laws that may work in your favor.

Step 2: Know your franchisee rights. Read over the Small Business Franchise Act of 1999 and see if your franchiser is in violation of any of the terms. If you are uncertain, make notes of questionable areas and then ask an attorney.

Step 3: Find your evidentiary support. Go back and read through any written correspondence between you and your franchiser (including contracts and emails) and see if there is any written evidence of exaggerated claims or promises as to the amount of training or support that will be given.

Step 4: Research other failed franchises. Do some research and see if other franchises have recently closed and why. You may indeed find that the franchiser has a habit of broken promises and inflated claims. You may even want to call other existing franchise owners to see what their experience has been. Also, do a Google search on the franchise company and the franchise contacts you dealt with to see if there are any online posts about them that are relevant to your situation. If so, get your printer ready!

While there are several reasons a franchise can fail because of the fault of the buyer, there are other cases where the franchiser is obviously at fault, basically leaving the franchisee to fend for him or herself after taking the franchise fee. If your case falls into the latter category, then there’s no reason why you should have to just shrug your shoulders and say "oh well" after you realize your franchise isn’t making a comeback. Instead, get the law behind you and fight back! If your franchiser told you everything you wanted to hear (stretching the truth all the while) to get you to hand over that franchise fee, then there’s a good chance that you’ll end up with the last laugh!

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.