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.
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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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