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11 Things You Need To Know About Buying A Franchise

Written by: Ken Hollowell

Article Overview: Ken Hollowell has assisted in selling over $150 million in franchises over the past 30 plus years. Mr. Hollowell discusses some of the necessary things a potential franchisee needs to understand before purchasing a franchise.

11 Things You Need To Know About Buying A Franchise

11 Things You Need To Know About Buying A Franchise

Know Your Rights as a Potential Franchisee
Before you begin to investigate the possibilities of purchasing a franchise it might be important to you to know that you have rights. The Federal Trade Commission strictly prohibits franchisors from doing certain things that may put pressure on you to make an immediate decision. Franchise regulations require a franchisor to provide you with full disclosure of their business opportunity in the form of an offering circular referred to as a Uniform Franchise Offering Circular. This document must comply with regulations governing the offering of a franchise. In addition, the franchisor is required to allow you 10 business days to review the document before they can require any payment of fees or signing of a franchise agreement. Any franchisor that violates these requirements can be subject to penalties, fines or prospecution. Also, you might reside in a State where there are laws that the franchisor must comply with.


The Success of Franchising
The success of franchising is unquestionably tremendous. This is due to a number of reasons. The major reason is franchisors are very selective in who they award a franchise too. Most franchisors have a profile of who the franchise candidate will be and if you fit the profile your changes of qualifing increases. No other business mood has the success of franchising. According to the U. S. Department of Commerce, the failure rate of franchising is less than 4%.


Two Types of Franchisors
The two types of franchisors are simply mature and infant. A mature franchisor has years of experience in franchising and their network is proven, tested, tried and have franchisees who will testify to the value of the franchise business. While an infant franchisor is someone who is just getting started in their franchise venture and may not have all of the tools and techniques in supporting a franchise network in place yet. This is not to say an infant franchisor is not a good purchase. Keep in mind that all franchisors started as an infant franchisor. There are many advantages in purchasing from an infant franchisor.


Two Types of Franchises
The two types of franchises are simply investment and job franchises. An investment franchise is a business that can possibility be an absentee owner that creates equity in the business within a short period of time. An example might be a fast food franchise. These franchises are often more expensive but can be very valuable over a period of time. The job franchise is where the franchisor is offering a business that allows the owner to enter a business that produces daily income. Usually this is a service business.


Full Disclosure
The decision to purchase a franchise business can be an exciting and rewarding decision.
There are many franchises, which offer to the buyer, opportunity, independence, growth, challenges, a comfortable income, prestige and security. However, many important questions need to be answered, both of you and by the franchisor before making any commitment to buy. The franchisor is required by the Federal Trade Commission (FTC) to furnish a potential buyer with a full disclosure document at the first personal meeting. This disclosure will contain information concerning the material facts about the franchisor. Such things as: the business background of the franchisor; who the officers, directors and key personnel are; the initial fees and cost of getting into the business; various obligations of both the franchisor and franchisee before and after the business is opened; the terms and conditions of the franchise; a copy of the actual franchise agreement; and many other matters that are important to your decision.
Never rely on verbal commitments or promises from a franchisor or franchise broker.
Get everything that may be interpreted as a promise in writing, especially if the promise, projection or commitment is not in the franchise agreement.


It is important to understand that a franchise is a contractual relationship.
What you buy when purchasing a franchise is an agreement. Most people believe the franchise to be the brick and mortar, the concept or idea that is being offered as an investment, the operations of the business or a variety of other things that only describe the franchise. In every franchise sold, a contractual relationship is formed between the franchisor and franchisee, which may be binding for, as many as twenty years or more. The value or worth of the franchise business will be determined by what is contained in the agreement. Too many buyers get caught up in the “dog and pony” show, while all excited by the “horns, whistles and sirens” going off or paying too much attention to the “sizzle” of the business. Don’t overlook the fact that you are buying an agreement and you must be able to live that agreement.


Study the agreement very carefully.
Know and understand what it says. Anything you don’t understand should be explained to you in writing. Don’t rely on verbal interpretation or explanations. If the agreement doesn’t say it and the basic disclosure document don’t address it, don’t be fooled into believing what someone might verbalize to you.


Franchise agreements are usually not negotiable.
The primary reason that franchise agreements are not negotiable is because they need to be uniform. That is to say, everything franchisee is offered the same thing. However, this may vary with an infant (a new franchising company) franchisor. An infant franchisor is one who has just begun offering his franchises and may not have his first franchisee yet. To induce or entice the first franchisee, the franchisor may reduce or even waive the franchise fee, offer lower royalty fees, or make available additional franchise agreements at a bargain price. However, the basic disclosure document should indicate whether or not the agreement is uniform.


Another very important area to be considered is the background of the officers, directors and key personnel of the franchisor.
In most new franchise offerings, the business experience of the franchisor may be limited. You must evaluate and determine whether or not you can be properly trained, supported and benefit from the management of the franchisor. Since as many as 50% to 60% of all new franchise businesses entering the franchise arena do not have company operations or prototypes, you will need to investigate the knowledge, experience, background and credentials of the people behind the franchise business very closely. You will want to know whom you will be involved with for the next twenty years or more.


If the business being offered has existing franchisees, take the time to contact as many of them as you can.
Ask such questions as: are you satisfied with your franchise?; has the business lived up to your expectations?; did you receive the type of training you expected?; are you satisfied with the support you are receiving?; is the business making the kind of income you expected? And can you recommend the business to me? Listen very carefully to the answers that are given to you. Is there still excitement in the voice of the franchisee? What is the franchisee really saying to you?


Capital:
You will need seed money of your own plus sufficient cash to maintain a positive cash flow for at least the first year. In a future session you will learn how to forecast future cash requirements through cash flow control. Many businesses can be started on a very small scale with a small investment. Then, as the business grows and you gain experience, cash flow from your business can be used for growth. In some cases you don't need starting capital to hire other people because you might start by doing everything yourself. The "do it yourself" start is a good way to learn everything about your business and also makes you better qualified to delegate work to others later on. You can control your risk by placing a limit on how much you invest in your business.

Related Articles
  Reselling Your Franchise
  Buying A Franchise
  Franchising with all its Success
  How to Purchase a Franchise that is Right for You
  Seven Questions to Ask when Starting a Franchise

Article Tags: franchise consultant, franchise your business, franchising



Related Forum Posts
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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