Before Investing in a Franchise
By Stephen E. Story, Franchising
Franchising accounts for a significant volume of the goods and services sold in the United States. Franchises generate an estimated $1 trillion in retail sales annually and employ nearly 8 million people. While you probably think of McDonalds and Burger King when you think of franchises, franchises exist in many diverse industries, including, as only a few examples, junk pickup and disposal, home nursing care services, computer services, preschools and dating services. Particularly as corporate downsizing continues and more people look for financial independence, many will explore whether to invest in a franchise.
Before investing in a franchise, consider the following:
Are you suited to be a franchisee? First, assess whether your personality lends itself to being a franchisee. Franchisors typically establish detailed rules regarding the products or services you may sell, how the products or services must be sold, as well as a variety of detailed legal, accounting and other rules. Unless you are willing to comply with these rules, you should probably forego investing in a franchise.
Decide on the right franchise. After you have decided you are suited to be a franchisee, the next question, of course, is what franchise do you pursue? Suitable franchises can be located through such sources as recommendations from current franchisees, library and Internet research, franchise expositions, local professionals and business or franchise brokers.
Conduct your due diligence. As with any investment, the burden is upon you to conduct all of your research and due diligence. Because you will have an ongoing relationship with your franchisor, and your success is highly correlated to the value of the business model and services provided by the franchisor, you must thoroughly investigate the franchisor and its track record. The franchisor is required by law to provide you with a Uniform Franchise Offering Circular (“UFOC”) before you sign a franchise agreement and invest in the franchised business. Be sure you and your advisors thoroughly review the UFOC and the franchise agreement to ensure the written agreement is totally consistent with what you have been told by the franchisor.
You should hire an accountant to help you prepare a financial business plan, including pro forma projections, which will forecast your profitability and the return on your initial investment.
I strongly recommend that prospective franchisees contact many other franchisees in the system. These franchisees can advise you whether they would join the franchise system, knowing what they know now, as well as lessen your learning curve as a new franchisee. A FRANCHISE IS LIKE A MARRIAGE; you need to have a great deal of trust and confidence in the franchisor to become comfortable committing to a long-term relationship. Hearing from satisfied franchisees may help you get over that hurdle.
Finally, after you have settled on a franchise that appears to be a good personal fit and economically viable, consult an experienced franchise attorney to review the documents for matters that may need to be clarified or added to the franchise agreement, including such important issues as territorial protection, termination rights, renewal rights, and the scope of any personal guarantees requested by the franchisor.
After engaging in these steps, you are ready to sign your franchise agreement and join the world of franchising. Good luck.
Key Franchising Links
International Franchise Association website
New York Attorney General website: What to Consider Before Buying a Franchise
Virginia State Corporation Commission Division of Securities and Retail Franchising
Franchising for Dummies (co-written by Dave Thomas, founder of Wendy’s) 2000 Hungry Minds, Inc. ISBN No. -0-7645-5160-4
IFA’s Franchise Opportunities Guide (Fall/Winter 2003) 2003 International Franchise Association
The International Franchise Association holds a Franchise Exposition annually in Washington, D.C., at which a large variety of potential franchisors currently marketing franchises pitch their franchise offerings to prospective franchisees. This year’s Expo will be held April 30, 2013 May 2, 2004 at the D.C. Convention Center.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.