What is owning a franchise

The franchisor generally provides assistance in identifying suitable business locations, which should minimise the risk of the franchise not operating successfully, and setting up so that it is ready to open for business. The term can be flexible, it could be as short as one year or have no fixed term and last forever.

The franchisor generally provides ongoing support, training and knowledge including of their past mistakes. This may be specific to their business model or general business training in areas like marketing, merchandising and accounting. Buying one is generally cheaper than starting your own business. If the franchise sells goods, the purchase price of the franchisee is generally cheaper than if it were a stand-alone business as the franchisor should have access to bulk discounts.

The franchisee indirectly benefits from advertising by other franchisees. Franchisees may be protected from competition certainly within the group , depending on the terms of their agreement. You have to abide by your agreement, which could include onerous terms. Some franchisors started by operating their own business.

Find out how long the franchisor has managed a franchise system. Does the franchisor have enough expertise to make you feel comfortable? If the franchisor has little experience managing a chain of franchises, take promises about guidance, training and other support with the proverbial grain of salt. In fact, a franchisor that grows too quickly may not be able to support its franchisees with the services it promises them.

Are they sufficient to support you and all the other new outlets the franchisor plans to open? Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for — and get — a copy of the FDD once the franchisor has received your application and agreed to consider it. The franchisor may give you a copy of its FDD on paper, via email, through a web page or on a disc.

The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you, and keep a copy for reference. Here are some key sections of the FDD:. Item 1 tells you how long the franchisor has been in business and its likely competition. It also lets you know if there any legal requirements unique to the franchised business, like a requirement that you get a special license or permit.

This will help you understand the costs and risks you will take on if you purchase and operate the franchise. Item 2 identifies the executives of the franchise system and describes their experience.

Item 3 lists important information about prior litigation — whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. This item will tell you whether the franchisor or any of its executives have been held liable for — or settled civil actions involving — the franchise relationship.

If there have been many claims against the franchisor, it may mean the franchisor has not performed according to its agreements.

Or it could show that franchisees are dissatisfied with its performance. Item 3 also should say whether the franchisor has sued any of its franchisees during the last year. That disclosure may indicate common types of problems in the franchise system. Item 4 discloses whether the franchisor or its predecessor, affiliates or any of its executives have been involved in a recent bankruptcy.

Consider having an accountant review the required financial statements too. These items describe some of the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases or rentals.

It also explains ongoing costs, like royalties and advertising fees. In addition, ask or find out about:. It may take several months to start your business, and it may take more than a year to break even. Some franchises never break even. Estimate your operating expenses for the first year and your personal living expenses for up to two years.

Compare your cost estimates for the franchise with what other franchisees in this system and competing systems have paid. An accountant can help you evaluate this information. You may be able to do better with another franchisor. These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet.

If the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers by establishing their own outlets or selling through the internet, catalogs or telemarketing.

Talk to the franchisor and current franchisees to get answers to your questions. Franchisees are often required to contribute a percentage of their sales to one or more national, regional or local advertising funds.

Ask the franchisor what advertising it has done and what is being planned. Ask whether franchisees have any control over how advertising dollars are spent, and if all franchisees and company outlets contribute equally to the advertising funds.

Find out if the franchisor gets a commission or rebate when it places ads. If there is a rebate, who benefits — you or the franchisor? If they buy their own advertising, do they get a rebate or discount on their advertising contribution?

New franchisees typically count on the franchisor to provide all the business and operational training needed to run a successful franchise. Check Item 11 for information about:. Be sure to talk with recent franchisees about the quality of training the franchisor provides. Item 17 covers important topics. First, it states whether you can renew your franchise at the end of the term, and, if you can renew:. Item 17 also explains what your obligations would be to the franchisor after termination.

For example, after termination, restrictions in the contract typically will stop you from operating a business that would compete with your prior franchise, if the new business is within a specified distance of your prior outlet. The restrictions may also prevent you from operating a new business within a specified distance of any other outlets of the franchise. The restrictions may last as long as three years. Lastly, it states whether you have the right to go to court if you have a dispute with the franchisor, or must use arbitration instead.

Item 19 contains claims the franchisor chooses to make about the sales or earnings of its franchises for which there is a reasonable factual basis. Any claims the franchisor makes about sales, income or profits must be in Item There are two exceptions to this:.

For tips on how to evaluate this information, see Evaluating Potential Earnings. Visit or phone as many of them as possible to chat about their experiences. Some franchisors may give you a separate reference list of franchisees to contact. To ensure you get the full picture, you may want to contact a number of franchisees listed in the disclosure document and some on the separate list.

Talk to several franchisees who have been in business just over one year. Prior owners can tell you:. Some franchisors may buy back failed outlets and list them as company-owned outlets. The franchisor must tell you who owned and operated the outlet for the last five years.

Contact as many of the previous owners as possible to learn about their experience operating the outlet that failed. Franchisors are required to list in the FDD the associations they sponsor or endorse and independent associations that ask to be listed. They may provide, depending on their size and resources, a marketing plan that covers a market analysis, strategy, sales forecast, and budget.

One obvious advantage that big businesses have over small businesses is their access to increased buying power. Then there are royalty fees and other startup expenses. SBA loans, in particular, are considered the gold standard in business loans, but they require meeting stringent eligibility requirements. Because the SBA reserves a portion of their loan allotment specifically for franchises , however, you may have an easier time of qualifying than if you were to seek an SBA microloan for starting up an independent business of your own.

Buying a franchise comes with its own set of issues and drawbacks. As mentioned above, the costs of buying into a franchise are high—in some cases, markedly higher than they would be if you started your own business. No matter how well run, efficient, and well-liked your franchise location is, your business is still tied to the national franchise—and any issues that brand runs into affects your business outcomes.

If a scandal rocks the national office, or another franchisee gets bad publicity, your business can be affected. Break one of those many requirements and you could lose your business altogether. You may be eligible if you have:. Additionally, traditional lenders like giving out loans to franchisees because they're being backed by a business model that has proven to work in the past.

These traditional lenders are especially happy to see brands they recognize, while lesser-known franchise brands may not be as appealing.

SBA loans are another popular choice for future franchisees. The SBA is a government institution that offers long-term rates at competitive rates. The SBA doesn't actually provide loans but instead guarantees a loan from a bank or credit union. This is an excellent option for someone with a low credit score who can't get approved for a small business loan from a bank on their own.

The loan can be used for a variety of purposes, from real estate to franchise fees. The interest rates for these loans will depend on the amount and length of the loan. For example, you can't use the loan to pay for franchise fees. While an SBA loan is easier to acquire than business loans from traditional lenders, it's still a time-consuming process and requires the lender to have a decent credit score.

If you own a home, you can take out a home-based line of credit or a home equity loan. Both of these options take the value of the equity from your home to approve the loan or credit. Home equity is the difference between what your property is worth and what you owe on the property. Note, though, that most banks won't let you take out a loan for the entire equity. A home line of credit allows you to have access to cash, which is backed by the equity of your home.