What You Need To Know - Series 2 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?
WHAT YOU NEED TO KNOW Series 2 - To learn more about this author, visit Ken Hollowell's Website.
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