Lots of people talk about starting a business. Many are attracted to the idea of “being their own boss” and the imagined freedom that comes with it. But not everyone has a great idea that’s going to get them on Shark Tank. That’s why many would-be entrepreneurs turn to the world of franchises in order to – in the words of the International Franchise Association – “go into business for yourself, but not by yourself.”
Buying a restaurant franchise or shipping services store that always seems packed with customers might seem like a no-brainer. Unfortunately, it’s anything but: buying, owning, and operating a franchise is a serious and expensive decision, one that demands a lot of thought.
Understand the Different Types of Franchises
There are two types of franchises, as explained by the U.S. Small Business Administration: product/tradename franchising and business format franchising. You need to understand the differences between the two types in order to determine which, if either, is right for you.
In product/tradename franchising, the franchisor owns the right to a name or trademark, which is licensed to the franchisee, who can then sell or distribute the franchisor’s products. A local Ford dealership is an example of a product/tradename franchise.
In business format franchising, the franchisor and franchisee have an ongoing relationship involving a range of services, such as advertising, marketing, or training support. In essence, the franchisor not only licenses its products and trademarks, it also licenses its complete business system. McDonald’s is a classic example of a business format franchise.
Think About Your Goals and Strategy
Keep in mind that owning your own business and being your own boss are two separate things, especially when it comes to business format franchises. The point of buying a franchise is that you are buying into an established business and brand, such as Midas Muffler or Dunkin’ Donuts. When you buy one of these franchises, you also buy into a complete system for running the business, which means that you’re not really your own boss.
Whichever type of franchising you are considering, understand how that will look day-to-day. Be clear about how much you can afford to invest and how much you can afford to lose. Understand how much control you will want to have over the business and how much you will actually have over it.
Also, think about your interests and background. Just choosing a franchise based on its prior success without thinking about what it would actually be to work there every day would be a big mistake. A quick oil-change franchise might make sense if you love cars, but it could be a terrible fit if you don’t know a manifold from a blindfold. The SBA Office of Entrepreneurship Education advises you to ask yourself an important question: “Would you be happy operating the business for the next 20 years?”
Do Your Research
The good news is there is a lot of information available about the wide, wide world of franchising. The bad news is a lot of it comes directly from the franchisors trying to sell you on their franchises, or from brokers working as commissioned middlemen.
Some of the best research can be the simplest. The Federal Trade Commission (FTC) offers some great advice in its Consumer’s Guide to Buying a Franchise:
- Visit franchise outlets that you might be interested in and talk to the owners. Ask them about their experiences with the franchisor.
- Go to the library and consult some of the franchise opportunities handbooks. These handbooks have information on hundreds of different franchises.
- Attend a franchise exposition. These events allow you to learn about different franchise opportunities and speak with representatives about the franchise. Don’t forget, however, those reps are trying to sell you on their franchise, and some may use high-pressure tactics. The FTC puts it plainly: “Be prepared to walk away from any franchise opportunity – and promotion – that does not fit your needs.”
Consult the Professionals
Entering into a franchise agreement is a serious decision, replete with detailed legal and financial obligations. If you try to navigate this daunting process on your own to save a little money, you’ll likely wind up spending a lot more later.
The Franchise Disclosure Document , also known as the Franchise Offering Circular, is a document required by the FTC. It lists background on the business offering franchises, including details about the company’s leadership, litigation history, and financials. The franchising agreement itself will be a detailed contract that contains the particulars outlining the business relationship between franchisor and franchisee. This agreement will address such items as required payments and fees, marketing and advertising resources and costs, and training programs.
Experienced franchising attorneys are skilled in reviewing all the legal documents involved with franchising. Both the SBA and FTC recommend seeking legal advice before signing anything.
Additionally, you should meet with an accountant or financial advisor. Both of the franchise documents will include detailed financial information and requirements. An accountant can assess the franchisor’s finances, as well as yours, helping you determine if the opportunity is right for you.
Leigh Raper has a JD from Pepperdine University School of Law. She writes fiction and blogs about pop culture, as well as items from the world of and labor and employment law. Leigh also writes for Avvo, the leading online legal marketplace connecting consumers and lawyers. Avvo also provides on-demand legal services that provide professional counsel for a fixed cost, make legal faster and easier.