The Fine Print on Franchises: What you need to know before signing on the dotted line.
Franchises offer entrepreneurs many benefits, including marketing tools and expertise, lots of back room support, and training to help new business owners succeed.
The road to the right franchise, however, may present some rough terrain to cross, which is why preparation is so critical. Every potential new franchisee needs to take the time to read the fine print before signing any contracts.
The good news is that Federal Trade Commission regulations provide a good safety net, which goes a long way toward helping potential new franchisees avoid getting a raw deal. A franchise coach can help you through the nitty-gritty of this process.
You will want to get a copy of the franchise disclosure document, which franchisors are required by law to provide you at least 14 days before you sign a contract or pay any money. You can ask for the document in any format convenient for you.
Before signing any contracts, we recommend you consult a franchise attorney who has the expertise to help you review what can be a long and complex agreement. In the meantime, as you begin your preliminary research, here’s what you should look for:
You want to know how long the franchisor has been in business. What’s the competition like? Pay close attention to the general business backgrounds of the company executives and how long they’ve been with the company and in the industry.
Has the franchisor been involved in any litigation with their franchisees? Have any of its executives been convicted of fraud or other violations of franchise law? Have franchisees filed law suits against the franchisor? These would all be red flags to further investigate if not disqualify this franchisor from your search.
Initial and Ongoing Costs
This is critical information since you never want to find yourself short on funds or surprised by costs you should have known about. Examples of costs franchisees face are: advertising, business promotions, operating licenses, inventory, royalty payments, cost to purchase equipment, and insurance, among others.
Only by estimating your costs can you realistically evaluate franchise operations to see if you have the capital to succeed in this business.
Franchisors may restrict from whom you order supplies, what you may offer for sale and where you can sell. Each franchisor will have different ways of determining a territory, which is meant to protect current franchisees but may not be satisfactory to you. For example, Dunkin’ Donuts has restrictions limiting some franchisees from also offering 31 Flavors ice cream.
While franchisors offer training, you need to know who is eligible for training and who pays. Are new employees eligible? Are support staff available for ongoing support? Again, make sure you know all the costs.
Franchises often are asked to contribute a portion of their earnings for advertising. Get the details on what the franchisor requires. What percentage of the advertising budget is spent in your area? Will local advertising amount to extra out-of-pocket costs?
Current and Former Franchises
Plan on talking to as many current franchisees as possible. Ask them what you will need to do to succeed. Also talk to former franchisees to learn what went wrong for them. Make sure you ask financial questions, such as their total investment, and how long it took them to recover their initial investment. What are their earnings? Franchisees’ income might vary quite a bit, depending on geographic area, the skill and commitment of the owner, and other factors.
You want to make sure the franchise company is financially stable since you certainly don’t want the company to go out of business just after you invested your money. You also want to ensure the franchisor has sufficient money to supporting its franchise system. You will have access to the financial statements of the franchise company, so review them – or better still, have an accountant review them for you.
For more information, check out the FTC’s website, which has published a consumer guide to buying a franchise at http://www.business.ftc.gov/documents/inv05-buying-franchise-consumer-guide
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Contact Dan Citrenbaum to create the career you’ve always wanted. As a Franchise Coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at firstname.lastname@example.org or at (484) 278-4589.
©Dan Citrenbaum 06/2015