What to know about buying a franchise

By: LawInfo

Opening a business takes time and money.  Some people opt to open a franchise - an existing business - rather than starting their own business from scratch. Buying a franchise is buying into someone else’s established brand and business model and some of today’s largest companies are franchises.  The largest franchises of 2007 include some of the country’s most recognized brands: 7-11, Subway, Dunkin’ Donuts, Pizza Hut and McDonald’s.

Here are a few tips to help find the best franchise opportunity for you:

Finances

How much money do you have to invest in the business, and where is it coming from?  If you are quitting a job to start a franchise do you have enough money saved up to provide for living expenses before your business starts earning money?  Also, franchises often require payment of an upfront franchise fee simply for the opportunity to get the business going.  However, if its a good franchise, it may become profitable sooner than a new business you try to grow on your own. 

Interest and Knowledge

Some franchisors require their franchisees to actively manage the franchise and not just be a passive investor.  If a franchise opportunity requires you to be actively involved only invest in what you know.  Make sure you have an interest or knowledge in the area the franchise sells its product or service.
 
Your Goal

Why do you want to buy a franchise?  Do you want to be your own boss, to open a business in a certain field, is it for a short term or long term investment, and are you doing it solely to make money?

Research Available Franchises

Franchise opportunities are available in almost every business field, and vary in the amount and type of work involved and amount of start-up costs.  The most common way to find an available franchise is to go to a company’s website you are interested in and look for a “franchise” or “investor” link.   If you are uncertain about what you would like to become involved in or what is available, franchise conventions offer the opportunity to meet face-to-face with company representatives.

Should you buy Big or Small

The size of the company may determine how much freedom you will have and how much initial and ongoing training you will receive.  The largest companies have more rules governing what their franchisees can and cannot do; franchisees are only expected to execute the franchisor’s proven business system.  In smaller franchises an owner may have more room to experiment or to operate the business to suit their individual tastes.

A larger franchisor will likely offer more training time and better instruction, with a larger staff dedicated to working with franchisees.  Larger franchises also allow you to be associated with a larger advertising campaign and a more widely known and trusted brand.

Talk to Existing Franchisees

You should always talk to the company’s franchise owners.  You should contact and talk to some in your area and some in other parts of the country.  One thing to remember is that the demand for a product may be higher or lower in different parts of the country and among different types of people.  Be sure to ask how long it took to become profitable and what the initial and ongoing training and communication with the parent company is like.

The Agreement

A Franchise Agreement will define the relationship between you (the franchisee) and the parent company (the franchisor).  At least 10 days prior to signing of any contracts the franchisor must also give potential franchisees the Uniform Franchise Offering Circular (UFOC), which must contain disclosures about expenses, financial statements, the obligations of both the franchisor and franchisee and other important information regarding the business, including past litigation.  It is strongly recommended that you have an attorney review both of these documents with you.

For more information about franchises, contact a business law attorney today.

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