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In opening a business, you have three primary options: 1) start your business from scratch, 2) buy an existing business, and 3) buy or lease a franchise. Each approach has advantages and disadvantages. In general, the differences relate to startup costs, establishing customer and vendor bases, staffing, and determining appropriate fixtures and equipment.
Franchising involves at least two levels of people: the franchisor, who contributes a trademark or trade name and a business system; and the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the "franchise," but that term is often used to mean the actual business that the franchisee operates.
Franchising is said to account for more than 40% of all U.S. retail sales. Industry analysts estimate that a new franchise outlet opens somewhere in the U.S. every 8 minutes, and approximately 1 out of every 12 retail business establishments is a franchised business.
Most towns have many franchises; some you may be familiar with are AAMCO Transmissions, Dunkin’ Donuts, Lawn Doctor, Dollar Discount, McDonald’s, H&R Block, and The UPS Store.
Choosing the right franchise for you is absolutely critical to long-term business success. Benefits vary considerably from one franchise program to another. To make the right choice, consider the following:
In addition to considering the terms referred to above, you should evaluate:
The Federal Trade Commission (FTC) requires that you receive a uniform franchise offering circular (UFOC) at least 10 business days before you are asked to sign a contract or pay any money. In the UFOC are 23 different categories of information about the franchise, including the franchisor’s experience, prior litigation, claims against the franchisor, and any bankruptcy involvement.
The circular should also disclose possible limitations included in the franchise agreement, such as goods or services you may offer for sale, from whom you may purchase goods, to whom you may offer goods or services, and the territory in which you may do business.
The circular will define any conditions under which your franchise could be terminated, and conditions under which you can renew, sell, or assign the franchise to others. It will also include information about training and assistance, and advertising -- the costs and potential benefits.
Find out what their experience has been. In speaking with them, use a checklist that includes all the questions you want to ask on topics such as:
Have both the UFOC and the franchise agreement examined by an attorney. It’s important to work with an attorney who understands franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws.
It’s also recommended that you ask a competent accountant to examine your anticipated expenses, your financing needs, and your prospects for achieving your desired level of profitability before you sign any agreement.
To obtain information from the FTC or to order their free publication A Consumer Guide to Buying a Franchise, call 202-326-2222 or visit www.ftc.gov . This Guide can also be downloaded at www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm.
U.S. Small Business Administration (SBA)
When you visit www.sba.gov and search for
“franchise,” you’ll find a wide variety of articles and publications on this
topic.
Tennessee Department of Commerce and Insurance, Consumer Affairs Division
Phone 615-741-4737 (Nashville) to determine whether there are any complaints
about a particular franchisor.
1350 New York Ave. NW, Suite 900 Washington, DC 20005 Web site www.franchise.org Phone 202-628-8000 Bookstore 800-543-1038 The IFA Bookstore offers many sources of information, including the publications Franchise Opportunities Guide and Investigate Before Investing.
By performing a search on the Web (for example, using Google), you can find many additional sites that offer franchise information and opportunities. Just a few of the ones we came across are listed below. The Greater Knoxville SCORE Chapter does not endorse any particular site or organization; we offer these simply as examples of the type of sources that you may find helpful.
www.ifb.com International Franchise Bureau
This handout is based on an article written by SCORE Counselor Gerald
Weinerman and published in the Knoxville News Sentinel. Mr. Weinerman is a
retired Vice President of Philips Consumer Electronics Company.
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