Although the success rate for franchise business is significantly better than for many other start-up businesses, success is not guaranteed. One of the biggest mistakes that you can make is to be in a hurry to get into managing a franchise opportunity. If you shortcut your evaluation of a potential business franchise, you might neglect to consider other franchises that are more suitable for you.
Don't be "pressured" into a franchise that is not right for you. Although most franchises are managed by reputable individuals, as in all industries, some are not. Also some franchises could be poorly managed and financially weak.
This Managing the Best Franchise Opportunities Guide is designed to assist you in investigating your options and get you all the business franchises information you need. Questions needed to adequately evaluate the business, the franchisor, the franchise package, and yourself are included.
What is a Franchise Business?
A business franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group seeking the right to use that identification in a business. The franchise governs the method for conducting business between the two parties. While forms of franchising have been in use since the Civil War, enormous growth has occurred more recently. Industries that rely on
franchised business to distribute their products and services touch every aspect of life from automobile sales and real estate to fast foods and tax preparation.
In the simplest form, a franchisor owns the right to a name or trademark and sells that right to a franchisee. This is known as "product/trade name franchising." In the more complex form, "business format franchising," a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even financing. Generally, a franchisee sells goods or services supplied by the franchisor or sells goods or services that meet the franchisor's quality standards.
There are a number of aspects to the franchising method that appeal to prospective business owners. Easy access to an established product as well as a proven method of marketing reduces the many risks of opening a business. In fact, Small Business Administration and Department of Commerce statistics show a significantly lower failure rate for franchisee-owned businesses than for other business start-ups. The franchisee purchases, along with a trademark, the experience and expertise of the franchisor's organization. However, a franchise does not ensure easy success. If you are not prepared for the total commitment of time, energy, and financial resources that any business requires, this is the point at which you should stop.
Investigate Your Business Franchise Options
As in all major business decisions, nothing substitutes for thorough investigation, planning and analysis of your options. This Guide is designed to help you set up a systematic program to analyze the possibilities and pitfalls of the franchised business you are considering. Use the questions below to guide your research and cover all the bases. Read the full Guide before you begin to gather the information you will need.
Sources of Business Franchises Information
You will need at least the following sources of information as well as experienced professional advice:
A directory of franchise businesses
such as the Franchise Opportunities Handbook (published by the U.S. Department of Commerce and available from The Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402). Others are available at your library.
The disclosure document
A Federal Trade Commission rule requires that franchise and business opportunity sellers provide certain information to help you in your decision. The FTC rule requires the franchisor to provide you a detailed disclosure document at least ten days before you pay any money or legally commit yourself to a purchase. This document includes 20 important items of information, such as:
Names, addresses, and telephone numbers of other purchasers
A fully-audited financial statement of the seller
The cost required to start and maintain the business
The responsibilities you and the seller will share once you buy
Talk to other owners and ask them about their experience regarding earnings claims and information in the Disclosure Document. Be certain that you talk to franchisees and not company-owned outlets.
You should get more information and publications from the Federal Trade Commission, the Better Business Bureau, the local Chamber of Commerce and associations, such as the International Franchise Association (1025 Connecticut Ave., N.W. Washington, D.C. 20076).
Finally, unless you have had considerable business experience and legal training, you need a lawyer, an accountant, and a business advisor to counsel you and go over the Disclosure Document and proposed contract. Remember, the money and time you spend before it's too late may save you from a major loss on a bad investment.
What is the business franchise?
Is the product or service offered new or proven? Is the product one for which you have a solid background? Do you feel strong motivation for producing the product or providing the service?
Does the product meet a local demand? Is there a proven market?
What is the competition?
If the product requires servicing, who bears the responsibilities covered by warrantees and guarantees? The franchisee? The franchisor? If neither, are service facilities available?
What reputation does the product enjoy?
Are suppliers available? What reputation do they enjoy?
Who is the franchisor?
Visit at least one of the firm's franchisees, observe the operation, and talk to the owner. You need to determine reputation, stability, and financial strength of the franchisor.
How long has the franchisor been in the industry? How long has the firm granted franchises?
How many franchises are there? How many in your area?
Examine the attitude of the franchisor toward you. Is the firm concerned about your qualifications? Are you being rushed to sign the agreement? Does the firm seem interested in a long-term relationship or does that interest end with the initial fee?
What, if any, restrictions apply to competition with other franchisees?
What are the terms covering renewal rights? Reselling the franchise?
Again, use your professional support to examine all of these questions. Some of the contract terms may be negotiable. Find out before you sign; otherwise, it will be too late.
Finally, an examination of your own skills, abilities, and experience is perhaps your most important step. Determine exactly what you want out of life and what you are willing to sacrifice to achieve your goals. Be honest, rigorous, and specific. Ask yourself:
Am I qualified for this field?
By learning capacity?
Ask yourself about the effects of this decision on your family? How will this new life style affect them? Do they understand the risks and sacrifices, and will they support your efforts? Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy, and money by you and your family can lead to an exciting and profitable venture.
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