How do I open a franchised business?
Recent Regulations and Resources
Investigate the Franchise
Investigate the franchiser and the franchise business as thoroughly as possible. Proceed as if buying a new car or a new home. Comparison shop, and look at more than one franchise.
But don’t stop your investigation there. Call or write several franchisers being considered to get more detailed information. In addition, investigate the territory being considered and determine the market potential for the product or service that will be offered.
Study Disclosure Statements
The franchiser is required by law to give you a disclosure statement (sometimes called an “offering circular” or “prospectus”), which describes the franchise system and your obligations, as well as certain required information such as the franchise company’s litigation and bankruptcy history and a list of current and former franchisees. It will be a great help in comparing one franchise with another, understanding the risks involved and learning what to expect and what not to expect from the franchise. Study the disclosure statement carefully before making an investment decision.
Check Out Disclosures
Read the disclosure statement carefully and compare it to other disclosure statements. Check the accuracy of the information disclosed. Contact several of the franchisees listed in the disclosure statement and ask them about their experience in the business. They can verify that the information provided and any other claims that are made by the franchiser accurately reflect their experience in the business.
Look for franchisees that have been in the business for at least a year. If none have been in business that long because the franchise is a new one, the risks you will run by investing in the franchise will obviously be higher than those of a well-established franchise. Also talk to franchisees that have been in business for only a few years. They will be able to give you the best advice about what to expect during your first year of operation. This is important because the first year of operation is often the period during which the success or failure of a new franchise is determined.
Question Earnings Claims
A franchiser can only provide information about the sales, income or profits of the franchised business, if it does so, in Item 19 of its offering circular.
Upon request, franchisers are required by law to provide detailed substantiation to prospective franchisees of any earnings claims they make. Be sure to note what percentage of the franchiser’s present franchisees has actually had sales, profits or income that equaled or exceeded the amount claimed. Find out how many franchisees did that well during their first year of operation and when their operating results may not have been as good.
A new franchise’s first year operating results are more likely to equal to those of other first year franchises than those that have been in business for several years.
Investing in a Franchise
Be Aware Of Risks
Everyone knows that there is some risk in investing money in the stock market. Investing in a franchise is similar. In some ways the risks are even greater than the risks of buying stock. A franchise owner can expect to invest not only time, but also a good part of his/her working life.
When considering a franchise, it is critical to collect information from people who have already been running a franchise you are considering.
Franchisees who have made the decision to purchase and operate the franchise will often explain first-hand about the financial arrangements, the start-up and ongoing assistance provided by the company and how much profit can realistically be expected.
It is important to talk to several franchisees. The time spent researching, by phone or in person, can be important investments and may be the best source to gain an understanding and insight into the day-to-day operation.
Organize notes to cover all the important points before contacting the franchise or making an on-site visit.
Before Selecting A Franchise System
Before investing in a particular franchise system, carefully consider how much money will have to be invested, your ability and goals. The following checklist may help on the decision to franchise.
- How much money do you have to invest?
- How much money can you afford to lose?
- Will you purchase the franchise by yourself or with partners?
- Will you need financing? If so, where can you obtain it?
- Do you have savings or additional income to live on while starting your franchise?
Does the franchise require technical experience or relevant education, such as auto repair, home and office decorating, or tax preparation?
What Skills Do You Have?
- Do you have computer, bookkeeping, or other technical skills?
- What specialized knowledge or talents can you bring to a business?
- Have you ever owned or managed a business?
- What are your goals?
- Do you require a specific level of annual income?
- Are you interested in pursuing a particular field?
- Are you interested in retail sales or performing a service?
- How many hours are you willing to work?
- Do you want to operate the business yourself or hire a manager?
- Will franchise ownership be your primary source of income or supplement your current income?
- Would you be happy operating the business for the next 20 years?
- Would you like to own several outlets or only one?
Obtain Professional Advice
Obtain independent professional assistance in reviewing and evaluating any franchise that is being considered. Such assistance is particularly important in reviewing the financial statements and agreements of the franchise.
Do not assume that the disclosure statement tells everything about the consequences of signing a franchise agreement and related contracts. The disclosure statement is not designed to serve that purpose.
The advice of a lawyer is the most important professional opinion to obtain before investing in a franchise. A lawyer can advise about legal rights in entering a franchise agreement and any legally binding obligations.
In addition, a lawyer may be able to suggest important changes in the contract(s) to better protect the franchisee’s interests. Attorneys will advise about any state and local laws that may affect the franchise business and will assist with the taxation and personal liability questions that must be considered in establishing any new business.
The cost of obtaining legal advice will be relatively small in comparison to the total initial investment for a franchise. Moreover, the cost of legal advice at the outset is less than the cost of late representation to solve legal problems that could have been avoided.
At the very least, prospective franchisees should be certain that every promise that’s made by the franchiser and his representative is stated clearly in the written franchise agreement. If such promises do not clearly appear in the contracts you sign, the franchiser may not be legally obligated to perform in accordance with such promises.
Do not assume that an investment in a franchise is risk free or virtually risk free, just because federal or state laws may provide some protection. That protection is subject to a limitation and may not be able to remedy every case.
Investing in a franchise will always involve a certain degree of risk. Franchisees should do everything possible to protect themselves rather than rely on legal rights for potential remedies.
What a Good Franchise Program Should Offer You
- A franchiser that appears to be stable in every way, including financial wherewithal.
- A federally registered trademark and a state registered trade name.
- A reliable, affordable product or service.
- A training program that will provide hands- on experience in every operation of the business.
- A detailed and readable operations manual, to guide the franchisee through start-up and well into successful operations.
- Support, for the franchisee and his staff on everything from site selection to decor, inventory and grand opening ads.
- Managerial training, including regional and national meetings, seminars and assistance in operations and accounting procedures.
- Marketing, merchandising and advertising support, everything from selecting retail decor and display ideas to setting up co-op advertising assistance.
- Monthly newsletters to keep the franchisees informed of the latest activities and trends. Keep tabs on the competition and feature the successful efforts of different franchise operators.
- Multi-store, multi-office or territorial expansion options. Unique designs that invite and draw customers into the franchise location.
- A continuing program of new project development and testing.
- Purchasing benefits from the franchiser, to buy products in volume with savings.
- The strength of a national, regional or local network of independently owned and operated franchisees and all franchise operations.
Note: The State of New Jersey does not regulate franchises.
For more information contact:
International Franchise Association
1900 K Street, NW, Suite 700
Washington, DC 20006