If you are reading this post, it’s likely that you’re giving some serious thought to buying a franchise – or, you’ve at least thought about it in passing.
Whether you dream of opening your own fast-food restaurant or your own car dealership, franchises offer a very attractive business model for entrepreneurs. This is particularly true in a bad economy when the prospect of starting you own independent business venture can seem risky.
The process of becoming a franchisee is relatively simple, but before you rush into making a down payment on your ideal franchise opportunity, there are several steps you should take to properly research a perspective franchise and understand its potential drawbacks.
Most of the information I am providing here comes from the Small Business Administration (SBA) and the Federal Trade Commission. Both offer excellent and in-depth step-by-step guides to buying a franchise.
However, your best single source of information is Business.gov’s Small Business Guide to Franchises and Business Opportunities. The site offers guides on evaluating franchise opportunities, what rights you have as a buyer, franchise compliance, and much more.
Here are four things you can do to ensure the investment you make is in a credible, proven franchise model and that there are no hidden pitfalls.
1. Do Your Detective Work
In addition to the routine investigation that any entrepreneur should undertake before making a business opportunity investment, be sure to get the big and little picture about the franchise and how it does business with its network of franchisees.
You can do this by contacting and visiting other franchisees under the same brand. You are also legally entitled to receive a disclosure document with information about the franchise’s legal, financial, and personnel history.
The FTC’s Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give you this information. Read the FTC’s Franchise and Business Opportunity Buyers’ Guide to understand what the franchisor is obligated to provide you.
2. Make Sure the Franchise Contract Meets Your Expectations
Before signing any contract, make sure you are sure of your business rights as a franchisee. Specifics you need to pay attention to include:
- Confirmation that you have legal use of the franchise name and trademark
- What training and management assistance the franchiser will provide
- Whether you can use the franchise’s expertise in marketing, advertising, facility design, layouts, displays, and fixtures
- That you are doing business in an area protected from other competing franchisees
In some cases, the franchisee may negotiate to have the franchiser help obtain building permits, purchase or lease equipment, signs and supplies, and construct or remodel the business premises.
3. Be Aware of Possible Pitfalls
Because the contract between the two parties usually benefits the franchiser far more than the franchisee, be sure you are ready to take on that commitment. Are you confident in your profit forecasts? Yes, you’ll be your own boss, but you’ll still have contractual and fiscal expectations imposed on you.
A franchisee is generally required to meet sales quotas and purchase equipment, supplies, and inventory exclusively from the franchiser. The franchiser also often has the right to terminate the franchise if it fails to operate the business according to the agreement, becomes delinquent on royalties, or violates other contract specifications.
Get help on how to clarify or get answers to your concerns before you invest here.
4. Employ Professional Help
The tax rules surrounding franchises are often complex, and an attorney – preferably a specialist in franchise law – can help you evaluate the franchise package and tax considerations.
You might even consider using an accountant to determine the full costs of purchasing and operating the business as well as assess your potential profit.
Get more information about evaluating franchise opportunities as well as your legal rights here.
Read Joel Libava’s blog – The Franchise King – and get even more information on franchise trends, tips, traps, and truths.