Franchise Buying Guide

World of Opportunity

Franchise, business opportunity or MLM? What you don't know can hurt you. Here's how to choose the entrepreneurial investment that's right for you.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Being an entrepreneur means constantly making choices. Good businesspeople weigh the options, make a decision and move on. Great businesspeople measure the advantages and disadvantages of the options against their business plans, make the right decision and move on.

You know you want to go into business, but you're not interested in starting from scratch; instead, you want to research investment packages available to you. Here are your options: a business-format franchise, a business opportunity venture or a multilevel marketing package. Each has advantages and disadvantages. Before you decide which route to take, understand the structures of the various formats. Their pluses and minuses may make all the difference.

Franchise Facts

Franchising is defined by state and federal laws as a commercial relationship in which three factors are present: a licensed trademark, a prescribed marketing plan, and the payment of a franchise fee for the right to participate in the program. When these three factors exist, the relationship is regulated as a franchise by state and federal laws.

In business terms, a franchise is a continuing commercial relationship in which the buyer, or franchisee, owns a business but agrees to operate it using the trademark and business system developed by the franchisor. The franchisor provides the franchisee with detailed training and assistance to start and run the business. In exchange, the franchisee pays an initial fee, typically $5,000 to $25,000, as well as an ongoing weekly or monthly royalty fee of anywhere from 3 percent to 8 percent of his or her gross sales.

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done your way, you may want to head in another direction.

Remember that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.

If you're considering buying a franchise, don't let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don't allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you'll realistically be able to pay yourself.

Road Map

Federal and state franchise laws require a franchisor to provide each franchise buyer with an offering prospectus, otherwise known as a Uniform Franchise Offering Circular (UFOC). This document provides a detailed description of the franchisor as well as the franchise program being offered, and it's required reading if you're serious about investing in a franchise.

Key sections in the UFOC will answer these questions for you:

  • What exactly is the franchise company all about, and how long has it been in this business? (Items 1 and 2)
  • What is the company's litigation and bankruptcy history? (Items 3 and 4)
  • How much will the total investment be, and what are the fees involved? (Items 5, 6 and 7)
  • Do I have to buy supplies, inventory or product from the franchisor or from third parties designated by the company? (Items 8 and 16)
  • How much training will I receive? (Item 11)
  • Must I buy a computer system, and will the franchisor have access to my computer data? (Item 11)
  • Will I receive a protected territory? (Item 12)
  • Is the company's trademark on solid legal footing? (Item 13)
  • Must I personally manage the business, or can I hire a manager? (Item 15)
  • Can the franchisor terminate the contract under any circumstances? (Item 17)
  • What are the names and addresses of the current franchise owners and those who have left the system in the past year? (Item 20)
  • Can I see a copy of the franchisor's audited financial statements for the past three years? (Item 21)
  • Can I see samples of the contracts I will be asked to sign? (Item 22)

Franchise laws require that a UFOC be delivered to you, the prospective franchisee, at the earlier of either the first personal meeting to discuss the specifics of the franchise (a trade show presentation generally doesn't count), or 10 business days before you pay money or sign a binding contract.

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This article was originally published in the July 1998 print edition of Entrepreneur with the headline: World of Opportunity.

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