Before you sign on the dotted line, read this guide for advice on evaluating franchise opportunities. When how And Where To Invest buy a franchise, you may be able to sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like any other investment: there’s no guarantee of success. The Federal Trade Commission, the nation’s consumer protection agency, has prepared this Guide to help you decide if a franchise is right for you. It suggests ways to shop for a franchise opportunity and highlights key questions you need to ask before you invest.
The Guide also explains how to use the disclosure document that franchisors must give you — under the FTC’s Franchise Rule — so you can investigate and evaluate a franchise opportunity. Is a Franchise Right for You? The Franchise Business ModelA franchise enables you, the investor or franchisee, to operate a business. Owning a franchise comes with defined costs, franchisor controls and contractual obligations. Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable. You may face significant costs to rent, build and equip an outlet and to buy initial inventory. You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. Typically, you must pay royalties for the right to use the franchisor’s name, even if you are losing money. You may have to pay royalties for the duration of your franchise agreement even if the franchisor doesn’t provide the services it promised and even if you decide to terminate your franchisee agreement early.
You also may have to contribute to an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your outlet. These controls may significantly restrict your ability to exercise your own business judgment. Many franchisors retain the right to approve sites for their outlets, and may not approve a site you select. Some franchisors conduct extensive site studies as part of the approval process and a site they approve may be more likely to attract customers.
Franchisors may impose design or appearance standards to ensure a uniform look among their outlets. Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs. Franchisors may require that you operate in a particular way. In some cases, a franchise advertising cooperative may require you to sell some goods or services at specific discounted prices, which may affect your profits. A franchisor may limit your business to a specific location or sales territory. You can lose the right to your franchise if you don’t comply with the contract.
You won’t have a right to renew unless the franchisor gives you that right. A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you’re likely to lose your entire investment. Franchise agreements may run for as long as 20 years. At the end of the contract term, the franchisor may decline to renew or may offer a renewal that doesn’t have the same terms and conditions as your original contract. For example, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Before you invest in a particular franchise system, think about how much money you have to invest, your abilities and your goals.
How much money can you afford to lose? Are you purchasing the franchise alone or with partners? What’s your credit rating and credit score? Do you have savings or additional income to live on until your franchise opens and, you hope, becomes profitable? What special skills can you bring to this business? What experience do you have as a business owner or manager? Do you need a specific minimum annual income?
Do you want to work in a particular field? Are you interested in retail sales or performing a service? How many hours can you work? How many are you willing to work? Do you intend to operate the business yourself or hire a manager?
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Will franchise ownership be your main source of income or a supplement to your current income? Are you in this for the long term? Would you like to own several outlets? Are you willing to let the franchisor be your boss? You can use a handbook to find a franchise if you don’t know the type of business you want, or to see which franchises are available for the type of business that interests you. Before you attend, research the kind of franchise that may best suit your budget, experience and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you.
How many franchised outlets are there? What is the initial franchise fee? What are the additional start-up costs? What management, technical and other support does the franchisor offer? What controls does the franchisor impose?
How long has the franchisor been in business? Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in detail. These meetings can be another source of information and give you a chance to raise questions, but they may also expose you to high-pressure sales tactics. Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs. They often advertise on the internet and in business magazines, offering to help you select among various franchise options. Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources. A broker also may help you finish applications and the paperwork to complete the sale.
Before you decide to use a broker, consider whether you need a broker’s services or could get enough information by shopping online or reading trade magazines. What choices does the broker offer? That may be true — or not. Ask how many franchisors the broker represents. A broker who represents only a few franchisors will give you limited suggestions. How does the broker select franchises?
Some franchise brokers may claim they will suggest only those franchises that meet certain standards. You may think this means that your risk is limited because the broker weeds out poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. A broker who does that might direct you to a franchisor that is failing or doesn’t have a strong history. Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned down.
Some brokers earn a flat fee regardless of the price of the franchise they sell. Others earn a commission based on the cost of the franchise. These brokers may steer you toward a more costly franchise to increase their commission. Ask who pays the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission. Are the broker’s earnings claims reliable?