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Franchise Buying Guide

Start a Business the Fast Way

Buying a franchise or business opportunity takes much of the fuss out of startup and lets you focus on profits and growth.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

At one time, holding an executive position in a prestigious company represented the top of the ladder. These days, there's a new, exciting dream: entrepreneurship. For blue- and white-collar workers alike, the life of an entrepreneur is alluringly glamorous. After all, what other occupation lets you be in total control, comes with the potential for boundless financial rewards and gives you such a feeling of personal accomplishment? In an era when corporate layoffs are disturbingly common, many people desire to break free from traditional career paths and start businesses they can call their own.

It's easy to dream, but making that dream a reality can be challenging. Fortunately, there are paths to entrepreneurship for those who lack the business know-how to do it on their own. Franchises offer a systematic approach to setting up shop. Business opportunities provide a business kit with clear guidelines for selling a basic product or service. Here's a closer look at how each option offers a fast and easy approach to entrepreneurship.

Franchise Forward
Today's consumers are very franchise-oriented. They seek out McDonald's to grab a burger or Supercuts to get a haircut because they know the names and are familiar with the products or services. But from a business standpoint, what defines a franchise? A franchise is a continuing, almost symbiotic relationship between a franchisor--a company that owns intellectual property and know-how--and a franchisee, who invests money in developing a business using the franchisor's intellectual property and experience.

Support Group
It's this relationship that can mean the difference between success and failure. "Franchising is popular because it's an avenue for entrepreneurs who have little or no experience in owning or operating a business to be able to go into business and have training available," says Andrew A. Caffey, a franchise lawyer in the Washington, DC, area. "It shortens the time involved [in startup] and addresses the concerns a lot of new entrepreneurs have about who they can turn to for help. In a franchise [system], you have a built-in support network--you can turn not only to the franchisor, but also to other franchisees."

Michael and Karla Irvin relied heavily on the support provided by their franchisor when they purchased a Kitchen Solvers full-service kitchen and bath remodeling franchise in Longmont, Colorado, in January 2005. Michael and Karla had previously worked in corporate marketing and office management, respectively, and consequently knew very little about running a business. Therefore, the amount of support and the two-week training session offered by Kitchen Solvers appealed to them. A corporate representative even helped them man a booth at their first home show shortly after they opened their franchise in March 2005. The Irvins continued to rely on the franchisor months after opening. "We were on the phone with them multiple times a day for the first six months," says Michael, 49.

The Irvins may not have had any prior business experience or knowledge, but they had some very attentive partners by their side who had a vested interest in their success. "I had seen a lot of great people who had great ideas but didn't know how to [get started]," says Michael. "I wanted a franchise that would, in essence, be a safety net if we had questions."

Most Valuable Document
The franchising system is highly regulated to provide security for the investor. Franchisors are required by law to send potential franchisees a disclosure document called a Uniform Franchise Offering Circular before any money is paid or contracts are signed. In the UFOC, you will find invaluable information, including the franchise fees, estimated expenses, history of the franchise and, most important, names and contact information of both existing franchisees and those who have left the system in the past fiscal year. Having such easy access to this wealth of information can translate into quicker startup for the investor. "It goes right to the fundamental question of why it is faster and easier to buy a franchise [than to start a business on your own]," says Caffey. "There's good learning and good experience you can lean on as an investor, and that starts in the sales process with a UFOC."

Well Worth It
Buying a franchise isn't cheap. A typical franchisor charges $25,000 to $35,000 upfront as well as a percentage of your business's gross monthly sales. You should carefully examine the value you will receive for your money, but the fees associated with a franchise usually result in rewarding payoffs. For example, the relationships Kitchen Solvers has secured with vendors helped the Irvins by removing the challenge of having to go out and secure their own. Says Caffey, "Most franchisees tell me that when a business is working well, the continuing value that results from being a member of the franchise system exceeds the monthly fees."

Franchise fees may seem steep, but starting a business from scratch will also inevitably require capital. And when it comes down to securing financing, having the name and brand of a franchise can actually improve your chances of securing a loan. In fact, the SBA has developed a program called the Franchise Registry that is designed to streamline the SBA loan application process for franchisees. "It has been an enormous success in the franchise field," says Caffey. The Irvins are among the countless number of franchisees who have used the program.

What's in a Name?
A significant portion of the franchise fee goes toward obtaining permission to use the brand's name. Customers flock to what they know and give their business to brands they trust. "The well-known marks of franchises like Burger King and Pizza Hut are powerful consumer magnets," says Caffey. "This magnetism is created and maintained by years of national advertising. We've grown up with these brand names. The power of a franchise trademark is that it promises consumers constancy. When someone pulls off a road at the sight of a trademark on a sign, he or she knows exactly what to expect."

In most cases, investors are also gaining access to a proven, time-tested and well-established system. The result is time gained and money saved. "Our franchise has been around for 20 years, so they have all these steps in place--from going out on your first call to installing--so you don't have to reinvent the wheel every single day," says Karla, 45. "There's a proven track record that works for them. That's [one] great thing about a franchise, especially when you're first starting out. You have no idea what to do, so you use their formula."

The husband-and-wife team stuck to the formula, and it's paying off: They reached their first-year sales goal of $250,000 by month nine and are expecting to reach $400,000 by the end of their second year. Says Michael, "We haven't had any regrets [about] starting out on our own or going with a franchise."

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This article was originally published in the June 2006 print edition of Entrepreneur's StartUps with the headline: Ready to Wear.

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