Is a Franchise Right for You?
We've all heard of big-name motels and restaurants that are individually owned franchises.
Did you also know that you could buy and operate a franchise business to:
- Shred documents
- Remove junk
- Groom pets
- Sell tools
- Design closet space
- Rent out audio books
Franchises are one of the fastest-growing kinds of business in the U.S. They generally have a higher success rate than other independent businesses. They sell every kind of product and service. You can buy into one for a few thousand dollars or more than a million.
Franchises appeal to many people who want to run their own business. But they're not for everyone. And, as always with any business, there are risks.
But there's help. The U.S. Small Business Administration (SBA) gives help on exploring, buying, and running a franchise. The U.S. Federal Trade Commission regulates how franchisors can sell a business to you.
Let's begin with some definitions.
What Is a Franchise?
Think of buying a franchise as buying a branch office of a business - a branch office that you'll own. Franchising is a way to distribute and sell products or services. A franchise is a contract between two parties, the franchisor (the seller) and the franchisee (you.) That contract governs how you'll do business.
For a price, the franchisor lends you the name of the business and gives you a detailed system to run the business. The product or service has to meet the franchisor's quality standards. The franchisor often supplies the products sold by the franchisee.
After paying an initial fee to the franchisor, you run the business. Frequently, you'll also pay regular fees, or royalties, to the franchisor. These fees are a percentage of the money the business earns.
The franchisor provides the know-how in marketing, management, financing, location, and training. You bring your entrepreneurial spirit and the drive to make the franchise a success.
Many franchises start out as one person's business. It succeeds, and the business owner expands the business by franchising it. The original business owner sells the right to operate branches of the business to people like you.
There are more than 320,000 franchises in the U.S., in 75 different industries. The International Franchise Association says that one out of 12 retail businesses in the U.S. is a franchised business.
Is Franchising For You?
Small-business magazines and Web sites have self-tests to help you think about buying a franchise. See if there's a match between franchising, your business ideas, and your personality. Try Entrepreneur, Inc. and Home Business magazines. Each also has a Web site.
Many advisors say that franchising makes sense if you prefer a business with a brand name and like the idea of having processes to follow, instead of doing everything on your own.
When you're ready to get serious, use the SBA's 16-page online workbook, "Is Franchising for Me?" It is clear and encouraging. It shows you exactly what you'll be getting into, and what to be especially careful of.
After you complete the workbook, you'll be able to
- Define franchising
- Decide if franchising is the best business choice for you
- List the advantages of franchising for both the franchisor and the franchisee
- Know your responsibilities, as the franchisee
- Know what is contained in an official franchise package
- Understand the franchise contract that you will have to sign
If you prefer, take a course on franchising. Most community colleges offer introductory courses. They help you decide about starting a franchise or other business.
You can also learn about franchises for sale, or get help deciding about buying one, from a counselor at a Small Business Development Center or at SCORE. The U.S. Small Business Administration (SBA) sponsors both. SCORE provides free, confidential business counseling, face-to-face and by e-mail.
Before You Buy a Franchise
The U.S. Federal Trade Commission (FTC) requires a franchise seller to give you detailed information in a disclosure document. If you don't get one, or don't understand the document, call the FTC toll-free help line at 1-877-FTC-HELP (1-877-382-4357).
You should also:
- Shop around. Go to a franchise exposition. Read franchise magazines and Web sites. Check out the SBA's lists of franchise companies.
- Speak with or visit current franchise owners. Ask if their experience matches what the company's disclosure document says.
- Insist on written calculations of your likely earnings.
- Get written details on how many franchise owners have earned what the franchisor predicts you will earn.
- Know that franchise sellers cannot accept your money until 10 days after giving you the disclosure document.
- Get all promises in writing.
- Get advice from a business adviser, accountant, or lawyer.
Additional Resources
Small
Business Administration
Easy-to-use information on buying a franchise. Find the "Is
Franchising for Me" workbook here.
A Consumer Guide to Buying a
Franchise
Buy a franchise only when you understand all these facts and tips
from the Federal Trade Commission.
Small Business
Development Center, National Information Clearinghouse
Find small-business classes, counselors, and other help in your
state. Use directories of franchises looking for new owners.
Check out franchise fraud alerts.
SCORE
This nonprofit association educates entrepreneurs. Ask for
business advice online or take a course through one of 400
chapters. (Previously called the Senior Corps of Retired
Executives)
SBA's Franchise
Registry
If you buy one of the franchises listed here and apply for an SBA
loan, your loan application will be processed very quickly.
Find a
Franchise
Search this huge database of franchisors by business category.
Find out exactly what each franchise opportunity requires of you.
Information is free for you, but franchisors pay to list their
businesses.
