NFIB

Buying Into a Franchise
03/ 28/ 2002


If you've been thinking of starting a new business, it's likely that you've been looking into the possibilities offered by purchasing a franchise operation. There are thousands available today, from hamburgers to automotive parts and supplies, and all have their advantages. Not to be overlooked is the fact that, as with any new business venture, they also have disadvantages. In today's Workshop, contributor Jeffrey Moses offers some general advice to consider regarding franchises.

Pro: Franchises often are "name brands" that are highly recognizable by the public, giving you a head-start in promotion of your new business. Also, franchises usually come with ready-made day-by-day operations schedules clearly defined and laid out (when to buy product, how much product to buy, when to advertise, where to advertise, etc.). This enables you to take advantage of what others have learned through direct experience in the business.

Con: Initial investment costs in a franchise can be prohibitive. The average cost of a franchise is about $150,000, although some are as low as $5,000. This may not include operating costs that need to be paid before and immediately after getting the business up and running. Also, ongoing royalty costs are often as high as 6 percent of gross revenues.

Pro: You have an enormous range of franchises to choose from. In 1997 there were over 600,000 different franchises. These generated a total of nearly $1 trillion. Clearly, this variety offers something for nearly everyone.

Con: It may be difficult to borrow the money from a bank to purchase and start a franchise. Some franchises offer financing packages, however.

Pro: A franchise offers a ready-made business with (somewhat) proven profit potential.

Con: The franchise agreement may be restrictive to an entrepreneurial spirit. Often, franchisors demand that all operations be handled in a certain way, limiting creativity of the individual franchise owner.

Overall, franchises may be ideal for those with enough money to get started, and who want the lowest risk possible in a new venture.

From a business standpoint, no one should even enter into negotiations with a franchisor to purchase a franchise without consulting and working with an attorney and/or accountant well versed in franchising. There are numerous detailed audits involved, as well as complete information about the franchise and estimated costs that are provided by the franchisor. This information is required of the franchisor bylaw, and will include the franchise's financial statements, responsibilities, legal situation, information about company officers, and a complete list of other franchise owners. This information can be confusing and may be misleading, so it should be carefully reviewed by attorneys or accountants.

Web sites that can help in your review of franchises:

For federal franchise laws and regulations:

www.ftc.gov/bcp/franchise/netfran.htm

www.franchise1.com (The Franchise Handbook)

International Franchise Association www.franchise.org

www.virtualfranchise.com (not a free Web site, membership is required)

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