Tag: Franchising

Considering that sales from franchises account for billions of dollars in revenue every year, buying a franchise is statistically the safest way to own a business – provided you choose the right franchise. Below are listed seven key steps that will help you choose the best retail franchise for you.

1) Evaluate your interests, skills and financial situation. Consider your interests and skills before you buy a retail franchise. What about owning a retail franchise appeals to you? Are you willing to work long hours – evenings, weekends, and holidays? Make sure you understand your financial situation; it could help you narrow down your options to what you can afford.

Buying a franchise means putting big dollars on the line, and, for better or for worse, your success doesn’t entirely depend on you – the quality of the company behind your franchise also matters. It is therefore important to learn as much as you can about the parent company before you make an investment.

Consider asking the following ten questions:

1) Is it a “package franchise” or a “product franchise”? The majority of franchises are “package franchises” – businesses such as fast-food restaurants, muffler shops or motels that come complete with a laid-out business model covering everything from financial controls to hiring guidelines. “Product franchises,” on the other hand, include businesses such as car dealerships and gas stations that exist primarily to distribute the parent company’s goods. Understandably, product franchise owners have more control over how they run their businesses than package franchise owners.

Originally introduced in 1998 and passed in 1999, the Small Business Franchise Act (SBFA) is has put into place certain safeguards designed to eliminate fraud and other activities that might exploit franchisee investors. Common opinion holds that the SBFA was introduced in order to give franchisees additional bargaining power against franchisors.
Michigan congressman John Conyers, Jr. stated that “Protecting the rights of franchisees is ultimately about protecting the rights of small businesses.”

The proof is in the details:

1) The bill reinforces existing prohibitions. The SBFA is a reminder that perpetuating fraud within the franchisor-franchisee relationship is prohibited.

2) The bill mandates good behavior and faith. Unsurprisingly, not everyone follows the rules in the world of franchising. The SBFA looks out for small franchisees by requiring all parties to act honestly with each other and observe reasonable standards of fair dealing in the industry.

Because investing in a franchise is a life-changing event, every prospective franchisee should thoroughly investigate a franchise opportunity before signing any sort of franchise agreement.

While there are multiple websites and books floating around that outline the steps that ought to be taken in the interests of due diligence, you should take a minute to review the “red flags” we’ve outlined below:

1) Is the franchise salesperson putting on the pressure? One of the traits of a good franchisor is that it wants to make sure there is a mutually good fit before “closing the sale.” Should you find yourself being pressured into making a decision but feel like you haven’t been given adequate time to think everything through, don’t sign an agreement. Frankly, the franchisor wouldn’t be hounding you like that if the franchise opportunity were, in fact, spectacular or if there were, in fact, a long line of potential franchisees. What’s more likely in a pressure situation is that the franchise opportunity is not that spectacular, their line is not that long, and, conversely, they need your money in order to make their payroll.

It takes immense discipline and fortitude to survive a franchisor’s bankruptcy. It’s a good idea to have a plan to minimize any potential losses in revenue and reputation, just in case such an unfortunate circumstance arises. When armed with a plan, you’re more likely to avoid disaster and consequently keep your business afloat.

The following are tips designed to help you get through franchisor bankruptcy:

– Heed warning signs: Hear a rumor? Investigate it. You do not want to find out the hard way – i.e., through a third party like a customer or the paper – that the franchisor is bankrupt, since doing so can compromise your rights and interests. If someone murmurs “bankruptcy,” be on the alert. The worst case scenario is that you determine that the rumor is no more than a rumor, and business resumes as usual. Some signs are very subtle, so pay attention. For example, if your franchisor is collecting advertising money from you but you don’t see any advertising happening, be on guard.

There are a number of ways you can find and purchase franchises. Keep in mind that due diligence is necessary, and anything that sounds too good to be true probably is.

The ways in which you can locate and purchase franchises include:

Directly Through the Franchisor: As a general rule, franchisors list information on their websites or will send you an information packet per request.

Internet: When it comes to online franchise directories, there are nearly too many to count. Many of these lead generation sites offer additional features, including advice on franchising, franchise law, and financing. Be aware, though, that, due to the sheer volume of available information, you may have difficulty deciding where to begin your search for the ideal franchise opportunity.

Your status as either a potential purchaser or merely a curious member of the public partially determines the amount and quality of information you’ll be able to discover about the financial performance of a specific franchise. Potential purchasers are able to find out about a franchise’s financial performance via the Federal Trade Commission’s (FTC) Franchise and Business Opportunity Rule. Under the Franchise and Business Opportunity Rule, franchisors are required to make a series of detailed disclosures to potential purchasers, either in the Uniform Franchise Offering Circular (UFOC) form or in the form provided by the rule.

In the United States, all franchisors must abide by the Federal Trade Commission’s (FTC) Franchise Rule, which requires franchisors to prepare a disclosure document called the Uniform Franchise Offering Circular (UFOC ) / Franchise Disclosure Document (FDD) and give a copy of that document to prospective franchisees prior to their purchase of a franchise.

The UFOC / FDD document consists of 23 different categories, which contain information such as basic investment, franchise fees, a financial statement of the franchisor and earnings claims (if the company discloses that information), how long the franchise will be in effect, bankruptcy and litigation history (including civil judgments and felony convictions) and information about the franchisor’s executives (such as past experience).