What will happen to your business if the franchisor closes up shop? 1. Running a franchise is cheaper than running other businesses, such as a chain store. Talk to the franchisor and current franchisees to get answers to your questions. If you have an exclusive or protected territory, it may prevent the franchisor and other franchisees from opening competing outlets or serving customers in your territory, but it may not protect you from all competition by the franchisor. Ask questions, including: Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in detail. When evaluating offers, please review the financial institutions Terms and Conditions. 1. These claims may not be true or can be misleading. Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field? Do you intend to operate the business yourself or hire a manager? For example, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. You can generally find some information on upfront costs on a companys franchise website, but youll want to contact the company (theres usually a form or an email) expressing interest to get a better sense of the specific costs involved. Francis notes that while "small franchise companies may offer ability to be nimble, look at what bigger firms have done to change . If you have a successful track record, though, youll want to explore them. Ready Customer Base Read more about how to check out a franchise in Additional Sources of Information at the end of this Guide. 1. Item 17 covers important topics. Review flexibility of franchisor with respect to new products, relocation and other variables. Will franchise ownership be your main source of income or a supplement to your current income? Franchisors may restrict the goods and services you sell. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion directly. If it doesnt, a company using the same mark in your area could force you to change the name or mark of your outlet at your expense. Whats your credit rating and credit score? Find the resources you need to understand how consumer protection law impacts your business. Franchise term length can be a good indicator of how much the Franchisor invests in their franchisees. Capital Risk. Because these loans are revolving, youll have access to the full amount of capital again once its repaid, and you might find that having access to this financing could be helpful for expenses down the line. I write about the franchising, restaurant and food services industry. Interview the franchisor aggressively. In exchange for the right to use the franchisors name and benefit from the franchisors assistance, you will pay some or all of the following: Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable. This is called a non-compete clause. Is the area you want to open well-known as an area in which franchises like yours can get customers in the door? He has covered financial topics as an editor for more than a decade. (And, if you dont yet have a. Randa Kriss is a small-business writer at NerdWallet. Franchise startup fees add up. It is important to consider all these factors when looking for a franchise brand. Are you willing to let the franchisor be your boss? Does it sound like you? Do you have savings or additional income to live on until your franchise opens and, you hope, becomes profitable? Perform a talent strategy audit for a future state. For example, the franchisor may have updated its FDD each calendar quarter and must update the FDD after its fiscal year ends. Before you decide to use a broker, consider whether you need a brokers services or could get enough information by shopping online or reading trade magazines. You'll want to make sure you can meet the qualifications and are willing to make the necessary investment before moving forward. OK92033) Property & Casualty Licenses, NerdWallet | 55 Hawthorne St. - 11th Floor, San Francisco, CA 94105. have competitive interest rates and long repayment terms. Are you willing and able to take on the role of a business owner? If you know how to read financial statements, this information will give you a good understanding of the franchisors financial health. All financial products, shopping products and services are presented without warranty. The territory The protected territory a prospective franchise will be buying should be defined, and this is crucial. You can always try to measure foot traffic by taking a manual count of people who go to stores in the area for a few hours. Their contact information can be found in the FDD. Consider your talents and lifestyle: Be honest about your skills and experience, as they can help you eliminate unrealistic business ventures. Read each of the 23 numbered Items in the FDD. Once you've identified a franchise that you want to move forward with, you'll need to figure out how you're going to finance your business. Sometimes, franchise systems fail. If you have any questions, now is the time to ask them. Once you've got a handle on who's out there, it will be easier for you to see where there are gaps in the marketand then fill those gaps with your unique brand identity. You have the right to ask for a copy of any updated information before you sign the franchise agreement. The financial strength of the franchisor : Is the franchisor financially strong and stable? Never contemplate purchasing a franchise without seeking the advice of an attorney who has reviewed FDD;s before. Indeed, you may want to get a copy of the franchisors FDD before you spend any money to investigate the franchise offering. A popular type of financing for those opening franchises is equipment financing. It also lets you know if there any legal requirements unique to the franchised business, like a requirement that you get a special license or permit. Some franchisors may give you a separate reference list of franchisees to contact. Ask how many franchisors the broker represents. An outlet with high gross sales on paper might be losing money because of high overhead, rent and other expenses. If you have a successful track record, though, youll want to explore them. , but you'll typically need a large upfront investment to get off the ground. Understand, too, that youll likely have to perform ongoing training, including training on new products and technologies, and brushing up on management skills and techniques. Tom Scarda a former franchisee and now a franchise coach and consultant offering advice to franchise buyers regarding evaluating the competition and what it may mean to their success as a franchisee Its smart to think about a product or service that is needed in your area and consider bringing that sort of business to the town. Talk to several franchisees who have been in business just over one year. Being an investor in a franchise isn't a cookie-cutter role. A franchise opportunities handbook, available from a library or online, will list available franchises by type of business and provide basic information about each franchise. Franchisors may ask you to sign a statement sometimes presented as a written interview or questionnaire that asks whether you received any earnings or financial performance representations during the course of buying a franchise. Any of these changes may result in higher costs, reduced profits or more competition from company-owned outlets or other franchisees. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing or personnel. Royalty fees are the amount of ongoing money (usually a percentage of gross sales) you pay to the franchisor for using their brand name and ongoing support such as marketing and developing new products or services for the franchisee. Lina M. Khan was sworn in as Chair of the Federal Trade Commission on June 15, 2021. Looking for legal documents or records? That may be true or not. When you consider a particular franchise, think about demand for the products or services it offers, whether competitors offer similar products or services, the level of support you will receive and the franchisors reputation. SBA loans. An official website of the United States government. Do I want to be a franchisee part time or full time? Here are the things to consider before buying a franchise: Are You Passionate About Owning A Franchise? These fees can range from $10,000 to $100,000 and are used to pay. You don't want to come in undercapitalized. Franchise agreements may run for as long as 20 years. Is your prospective location near public transit, or is there ample parking? The franchisor may add to the information in Item 19. But growth alone doesnt ensure that franchisees will be successful. The best way to do this is by looking at how many franchises they currently have in operation and are they profitable. There are many considerations that factor into this life-changing step. Consider potential opportunities in these neighborhoods or areas. The .gov means its official. Any claims the franchisor makes about sales, income or profits must be in Item 19. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisors name for a specific number of years and assistance. If the franchisor wont provide them, even if you volunteer to sign a confidentiality agreement, consider a different franchise opportunity. Associations of a franchisors franchisees are an important source of information. The hours and personal commitment necessary to run the business. During my travels, when giving seminars or speaking at conferences, people often ask me questions about different franchises and franchising in general. If there is a rebate, who benefits you or the franchisor? You may be able to do better with another franchisor. Additionally, Item 17 describes what you must do to get the franchisors approval if you want to sell your franchise. If you've decided that opening a franchise is right for you, you can follow these steps to make it happen. You need funds, tools, and a team. If your goal is to purchase a franchise, choosing the right franchise brand to invest in is one of the most important decisions you'll make as a business owner. Depending on the franchise youre a part of, you may be able to enjoy ongoing mentoring and training from the franchisor, making you a more savvy business owner in the years to come. It may take several months to start your business, and it may take more than a year to break even. By that I mean that you should review Item 20 of the FDD and call all of the existing franchisees who are in your general area., There are additional factors to consider when reviewing the franchisors FDD. Is the area you want to open well-known as an area in which franchises like yours can get customers in the door? These items describe some of the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases or rentals. You can use a handbook to find a franchise if you dont know the type of business you want, or to see which franchises are available for the type of business that interests you. Will you have access to the same suppliers? It starts with speaking with existing franchisees as well as those who left the system. But purchasing a franchise is like any other investment: theres no guarantee of success. Visit the Business Center at business.ftc.gov. These brokers may steer you toward a more costly franchise to increase their commission. Using an average figure may make a franchise system look more successful than it really is, because the high incomes of just a few very successful franchises can inflate the average for all franchisees. You may want to ask members of a franchisee association about: Item 21 provides the franchisors three most recent audited annual financial statements. 1. Given the severity of the investment, a franchisee must commit to doing due diligence. Item 4 discloses whether the franchisor or its predecessor, affiliates or any of its executives have been involved in a recent bankruptcy. Before you make the ultimate decision about this option of going into business, I recommend that you spend the time to do your research and: 1. This is a BETA experience. A self evaluation and clear picture of your skill sets and eventual end game- exit strategy, will help ensure that you invest in the right opportunity. The FDD should include information about any such laws in your state. Scott Milas, a Certified Franchise Executive (CFC) and Certified Franchise Consultant (CFC) with The International Franchise Professionals Group recommends you consider these questions: What is your "Know" and "Why? Understanding "why" you are interested in owning your own business, and "knowing" who you are, are critical steps in choosing the right opportunity. Instead, invest in a business that will give you the time and money to enjoy your hobby until your heart's content. In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far less. How many franchised outlets are there? But, before you invest, take a close look at the Franchise Disclosure Document (FDD) of your potential franchisor, focusing on . Could you be dealing with a fad? Scarda adds Dont buy a business because it has to do with your hobby. This means there's plenty of time for the franchisee and franchisor to work together and develop a solid relationship. When you review earnings claims, consider: Suppose a franchisor claims that franchisees in its system earned $50,000 last year. This is probably one of the very first things you should be asking yourself. These figures dont really tell about the franchisees actual costs or profits. The franchise has an existing. Do you have the support of your spouse or partner? Business line of credit. If you do, you will no longer have a hobby and you will probably resent the hobby if youre trying to pay your mortgage with it. You have to dully depend on your franchisor to promote your business. February 6, 2023 While there are a lot of items possible franchise buyers should consider when purchasing a franchise, we will examine the top 3. Buying a franchise, therefore, can be an advantageous way. Ask whether there are complaints on file about the franchisors products, services or personnel. However, will it make money? Before sharing sensitive information, make sure youre on a federal government site. For instance, consider food, beauty, home services, real estate, hospitality and fitness and then take a look at, If you're not sure the franchise is a good fit after the discovery day, listen to your instincts there are many. Still, it also means that the franchisee may not be allowed to retain the business if something doesn't work out. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission. Others earn a commission based on the cost of the franchise. Talk to them, rather than relying on information from the broker alone. Some franchisors conduct extensive site studies as part of the approval process and a site they approve may be more likely to attract customers. What is the initial franchise fee? To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. It's not just about finding a company with a proven track record but also finding one that fits your personality and lifestyle. available and you don't want to invest in a business that isn't right for you. Is the franchisors name so well known that it will bring in customers, or will you have to create a market for the franchise? Track enforcement and policy developments from the Commissions open meetings. In such a case, the franchisee must exit the business. The FDD should state whether there are geographic differences between the franchisees whose earnings are reported and your likely location. Check with the local BBB in the cities where the franchisor has its headquarters and the city where youre thinking of buying a franchise. The franchisors disclosures may change between the time you receive the FDD and the time you sign the franchise agreement. 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. However, just because there are no batting cages in your town and you think it would do great because there are kids everywhere, you may be right. You can use websites like the Better Business Bureau and Franchise Business Review to read reviews and comments from franchisees to get a sense of their experiences. Can you compete with others who have more formal training? Its very likely that youll have to attend regional or national training to become an expert and get your franchise up and running. The FTC works for the consumer to prevent fraudulent, deceptive and unfair practices in the marketplace and to provide information to businesses to help them comply with the law. Investigate the franchisors financial assets and resources. Franchise contracts last only for the number of years stated in the contract. Are there certain businesses that attract a clientele that would be your ideal customer? Posted : April 4, 2023 Category : Franchise Experts A critical step in the process of buying a franchise is a comprehensive due diligence examination to ensure you are making an informed decision before entering into an agreement. 5 things to consider before buying a franchise- Is it right for you? Many franchise contracts will give you a chance to cure an occasional failure to comply (like making one late payment) but keep the right to terminate your franchise for other failures. Here are eight questions you should ask yourself before starting a franchise business. NerdWallet strives to keep its information accurate and up to date. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. Here are some key areas to consider: Franchise fees are one-time payments made when purchasing a franchise. Pro: Instant Brand Recognition. Guaranteed by the U.S. Small Business Administration. Earnings may vary with geography. If your location isn't a good one, your franchise will not succeed. Talking to these people may be the most reliable way to verify the franchisors claims. On the contrary, if you're an experienced business owner, you may want to consider buying an existing business. Learn more about your rights as a consumer and how to spot and avoid scams. You may face significant costs to rent, build and equip an outlet and to buy initial inventory. Some franchisors started by operating their own business. This means finding out the true cost of entering into the franchise. This is also a document that your lawyer should review. These contracts usually are long and complex. Purchasing a franchise is like any other investment: it comes with risk. What backgrounds do the current franchise owners have? First, it states whether you can renew your franchise at the end of the term, and, if you can renew: Item 17 also explains what your obligations would be to the franchisor after termination. Buying a franchise, therefore, can be an advantageous way to start a business, but you'll typically need a large upfront investment to get off the ground. There are also SBA 504/CDC loans, which are meant to finance large fixed assets such as real estate. The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely. In addition to analyzing the franchisors' financials, it's also vital to examine their overall track record. Here is a list of our partners. What controls does the franchisor impose? Dont be shy about asking for explanations, clarifications and answers to your questions before you invest. Because these loans are revolving, youll have access to the full amount of capital again once its repaid, and you might find that having access to this financing could be helpful for expenses down the line. For example, after termination, restrictions in the contract typically will stop you from operating a business that would compete with your prior franchise, if the new business is within a specified distance of your prior outlet. Level of investment. When starting a business, you must, must do a comprehensive business plan before anything else. Knowledge about the product Although the franchise business is well established & their brand is popular enough to drive your customers but if you don't have much knowledge about their products, it's difficult for you to grow your business. You also may have to contribute to an advertising fund. Search the Legal Library instead. There are many ways other than franchisors websites to find information about franchise opportunities, including visiting local franchised outlets, looking at franchise handbooks, attending franchise expositions and working with franchise brokers. These traditional business loans enable entrepreneurs to access lump sums of capital to spend as theyd like on their business. Item 20 provides charts showing growth and owner turnover in the franchisors system. Franchises provide a proven business model but can require significant upfront costs. On average, depending on the type of franchise, home based vs a retail location, franchise brands have terms that last ten years or less. A franchisor may limit your business to a specific location or sales territory.