MONEY

5 steps for buying a franchise

Rhonda Abrams

@RhondaAbrams

You’ve always wanted to run your own small business – be your own boss. But you don’t want to start from scratch. Maybe you don’t have that “big” idea, don’t know where to start, or aren’t sure you have all the skills you need.

Then, someone suggests you get a franchise. “It’s all done for you – it’s a recipe for success.”

Are they right? Is getting a franchise a good way to start your own small business?

Well, yes and no. It all depends on the franchise.

We’re all familiar with franchised businesses, from the biggest or best-known, like McDonald’s, Hertz, Supercuts, to some of the smallest or most surprising, like Jazzercise or the pet-training business, ZoomRoom.

Franchising as a concept is simple: A parent company (the franchisor) develops a model for a successful business and builds and advertises a brand. An individual (the franchisee) licenses that brand, products/services and business model – typically with exclusivity for a specific geographic location.

Franchises, as a choice of small business, work for people who:

•Want the security of choosing a brand-name business with proven products.

•Want a “turnkey” operation with established business operations and guidelines, training and support.

•Are willing to follow rules. Most franchisors do not allow you to deviate from the products and services they sell, the suppliers they use, and the way they do business.

•Have money to invest up front. You will have both a franchise fee and startup costs.

•Are willing to split the profits. You are likely to have monthly royalty and advertising fees and a variety of other fees and costs.

•Are willing to work hard. Just as with any business, running a franchise still takes a lot of work to succeed.

•Are willing to take the risk that the franchisor may not renew their license at some time in the future.

Now, please note that I have carefully avoided using the term “buying” a franchise. That’s because you are not buying a business, you’re licensing rights from the franchisor. Yes, you may buy property and equipment and supplies, but the business itself – the name, products/services, operation manual – all belong to the franchisor.

That’s an important distinction because, at the end of your contract, the franchisor may be able to unilaterally end the relationship or radically change the terms of your agreement. You may have invested hundreds of thousands of dollars in a location, built up customer goodwill, and have it snatched away.

So be sure to investigate the franchisor thoroughly. Here’s how to start your research:

1. Find potential franchises, and check out resources and guidance from the International Franchise Association, www.franchise.org, a “pro-franchise” organization made up of franchisors.

2. Get the other side of the story, including advice on potential problems, from franchisee organizations: the American Association of Franchisees and Dealers, www.aafd.org, and the American Franchisee Organization, www.franchisee.org.

3. Receive a “FDD” – Franchise Disclosure Document – from a franchise you’re seriously considering. The disclosure is required by law and will detail many of the aspects of the contract you are signing.

4. Absolutely talk to other franchisees, both current and former, of the company you’re considering. Larger franchises may have an organization of franchisees – reach out to them. You can find a partial list here.

5. Get professional help. If there are large sums of money involved – as in acquiring most franchises – hire a franchise consultant or franchise lawyer. (Do not depend on just a general business attorney.)

Beware of any franchise that:

•Does not have a proven business concept and successful operation system.

•Has a history or conflict and litigation with its franchisees.

•Does not provide a list of current and former franchisees.

•Does not have a well-established trademark or brand recognition.

•Provides minimal or no initial and ongoing training and support.

•Does little or no advertising.

•Does not give you territory exclusivity so no other franchisee (or the parent company) can encroach on your location.

•Requires you to purchase supplies or services at inflated prices from them or their approved vendors.

•Uses the fees franchisees pay primarily for selling more new franchises.

Many successful franchisees will happily sing the praises of owning a franchise. It can, indeed, be a “recipe for success.” Just be sure you do your homework to find the right franchise, and make sure you’re the right fit for a franchise business.