Use These Simple Guidelines- How to Buy a Franchise

How to buy a franchise ...
Your First Steps...

Evaluate franchise potential, learn how to open a franchise. If you haven't already completed your preliminary evaluation, review here...How to Choose a Franchise.

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Once you've selected your potential franchise partner or chosen a couple of franchise opportunities to thoroughly review, contact each company and obtain their offering package...Done?

Now follow the steps outlined below...

(Jump back to Preliminary Steps)

• Study each company's documents

These documents may be called an Offering Prospectus(OP), a Disclosure Document or a Franchise Offering Circular.

• Look for companies that are at least 3 years old, five is better.
• You will want to discover whether company executives have been involved in any previous litigation or bankruptcies.
• Do they have previous experience with franchise operations?

• Your franchise fees pay for rights to use the franchisor's name, along with varying levels of support and marketing assistance, you may pay some or all of the following fees and costs:

• Initial fee: This "franchise fee" is not refundable with most companies. Expect to pay for:

• Additional Equipment
• Inventory
• Signage (if necessary)
• Operating Licenses
• Insurance
• You may be required to pay for "grand opening" assistance.

• Royalties:
  
If your chosen franchise requires royalty payments, read their agreement carefully. Some require these payments even if you've not made any money. (Sometimes this payment is made for the right to use the franchisor's name, and must be paid even if they fail to provide support services as agreed.


• Advertising:
  

Many franchise agreements include an advertising fee.

• Make sure the funds will be used to assist with advertising for your area. Sometimes these funds are used for national advertising programs or to attract new franchisees, and may not directly benefit you.

• Franchises by their very nature are designed to ensure consistent uniform operation between all franchised units. Therefore, your franchise agreement will have built in controls.

Read this portion of your agreement carefully?you are bound to perform by these controls and may lose your franchise if you do not comply...A few examples follow:

• Design standards:
You may be required to use the Franchisor's signage, from their chosen "approved" suppliers. You may be able to obtain the same signage cheaper somewhere else, so your cost is higher. Some even require seasonal changes, these can add additional cost.


• Imposed Restrictions:
You may not be able to offer additional goods or services, outside the franchised operation.You may even be required to purchase goods from dealers the franchisor imposes upon you. Read these restrictions carefully.


• Method of Operation:
You may be required to operate during certain hours. It?s not unusual for Franchisors to impose other restrictions, such as approved uniforms, advertisements, even accounting methods and procedures.


• Restricted Areas or Territory:
You may be limited to a specific geographical area. Depending on the type of franchise operation you are looking at this could impede your ability to grow your business.

• Your Franchise agreement will be for a specified time period.

Renewal may be based upon your performance, therefore, there is no guarantee you can renew. You must comply with the contract during the duration of the agreement, or you may lose your franchise rights.

• Termination:
Your agreement may be terminated if you fail to comply with your agreement, an example: failure to pay royalties or comply with operational standards.
• Renewals.
Terms for Franchise agreements vary, but it's not unusual for the initial term to run for 5 or more years.


Renewal is not guaranteed. Your renewal contract most likely will contain different restrictions or costs, and your territory may change, again there are no guarantees.

When negotiating, it is best to arrange for the longest initial term possible. Also, you may be able to draft the terms for your renewal as part of the original agreement.

(Make sure you review this section of your franchise agreement very carefully.)

• Know The Demand for Your Product or Service

• Will you cater to seasonal customers?
• Is There a Demand for Repeat Products or Services?
• How will you generate repeat business?

• Who is Your Competition

• Competing companies in your service area?
• How many? ...how long have they been operating?
• Do they have high name recognition?
• Competing franchises or other company owned stores in your area?
• What about nationally? Who else offers similar products and services?
• How does their pricing vary from what you?ll offer?

• Operations - Continuity

• Although it doesn't happen often, franchisors do fail. Are you comfortable with your ability to operate alone if that were to happen?

• What is Your Chosen Company's Credibility and Recognition

• How well recognized is the name?
• How long have they been in operation?
• Check with the Better Business Bureau or Consumer Protection Agencies in the areas of operation to discover filed complaints.

• Support and Training

• What support services does the franchisor provide?
• How does this support compare to others in the industry?
• Does this franchise offer formal training?
• How similar is your own background to other franchisees who are most successful?

• Franchisor's Experience and Management Expertise

• How long has the franchisor managed this franchise system.
• How many franchises are in operation? How successful have they been?
• How long have they been in operation?
• Inquire of current franchisees about their experiences?You are well advised to visit with one or two other than the franchisees you are originally referred to by the Franchisor. (They will sometimes send you to a franchisee that is having exceptional results- not typical of other owners.)
• What is their business background?
• How long have they been with the company? Consider the length of their experience.

• How Fast Is The Company Growing?

Growth is a two-sided sword, with both benefits and challenges.

• A growing system may help you attract more customers, and increase your franchise name recognition.
• Be careful, however, because fast growth can challenge the Franchisor, and they may not be able to keep up with the required support.
• The franchisor should have enough financial strength and support staff to ensure they can fulfill their obligations to support their franchisees.
• (Your accountant should be able to help you make that determination.)

• Have Your Accountant Review the Franchisor's Financial Statement and Disclosure Documents

• Franchisors are required by law to provide you written substantiation of any earnings claims.
• The disclosure document must inform you of bankruptcies and prior litigation, both for the company and its executive officers.
• This will help you determine whether or not the franchisor is financially stable, conducts business legally and ethically, and if they can deliver as promised.
• Some franchisors have tried to conceal an executive's litigation history by removing the individual's name from their disclosure documents.

This is a Must!...

• Your Attorney's Review of the Franchisor's Offerings and Disclosures

• Do not sign any contract or make any payment until you have thoroughly investigated the opportunity.
• Your attorney should review all the documents offered by the Franchisor.
• Make sure he explains any provision you don't understand.
• You have the right to review all documentation.(Current law gives you at least 10 days prior to signing or paying any fees to the franchisor.

(You can now download our "Comprehensive Guide- "How to Choose A Franchise" as a pdf document.)

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