Franchises for Would-Be Entrepeneurs
Opening a new, independent business involves significant risk.
For this reason, many entrepreneurs look to franchising as an alternative to starting from scratch. But not all franchises are created equal.
The following advice from the Texas Society of CPAs provides an overview of some of the things you should consider before investing in a franchise.
DETERMINE WHETHER A FRANCHISE IS RIGHT FOR YOU
Franchising has its advantages and disadvantages. A major advantage is that many franchises come with an established customer base as a result of brand recognition. In many cases, the franchisee also benefits from help with site selection, training, store design, operating procedures, and marketing materials.
On the down side, franchises can be expensive and even though it’s your business, many must be operated according to strict detailed guidelines. If you feel strongly about doing things your way, you might be better off in an independent business.
READ THE OFFERING CIRCULAR
The Federal Trade Commission (FTC) requires franchisors to provide prospective franchisees with a comprehensive document called a franchise disclosure document (FDD), formerly known as the “Uniform Franchise Offering Circular (UFOC).”
The document is required by law to be written in plain English.It provides basic facts about the company, including the names and business background of the franchise’s principals, its litigation history, finances, costs, restrictions, training and other assistance provided, and conditions for termination. Study this document carefully so you are aware of what you are getting into.
UNDERSTAND THE FEE STRUCTURE
When you buy a franchise, your investment risk is reduced because you are joining an established company. But you pay for this with a hefty franchise fee. Be sure you understand what the fee covers.
In some cases, all start-up costs are included, while others charge extra for training, marketing and other services. In addition, most franchisors charge royalties and advertising fees of 3 percent or more of revenues – regardless of how well or poorly your business is doing.
KNOW WHAT SUPPORT TO WHICH YOU’RE ENTITLED
How much training will you get? Will the franchise help with ads, bookkeeping and personnel matters? What about supplies and equipment?
Some franchises require that you buy almost everything you need from them. If that’s the case, you’ll want to know if the costs are competitive with other sources.
TALK TO CURRENT AND FORMER FRANCHISEES
Speaking with current and former franchisees is probably the most reliable way to learn more about the franchise you’re considering. Don’t limit yourself to local franchisees. These individuals may view you as a potential competitor and may discourage you.
Try to get a sense of their overall experience with the franchise. Find out whether there were any unanticipated costs. A good question to ask is whether they would invest in another outlet. Talk to former franchisees as well to find out what went wrong.
VISIT THE HOME OF THE FRANCHISOR
If at all possible, try to meet the franchise’s key players – the principals and those who manage the training, accounting, operations, and customer service functions. Make a judgment about whether they are the kind of people with whom you would be comfortable working.
OBTAIN PROFESSIONAL ADVICE
Hire an attorney experienced with franchising to review the offering and answer any questions you may have. Don’t rely on the numbers the franchisor gives you. A CPA can provide valuable insight and advice concerning the financial strength of the company and the economics of the opportunity.
(Updated and reviewed 2017)
Copyright 2006, The American Institute of Certified Public Accountants