For many, the idea of owning your own business and being your own boss is alluring: you set your hours and you alone reap the rewards of your endeavors. Unfortunately, the road to success is often paved with many perils: employee costs continue to spiral as do the cost of goods; increased competition from other companies both here and abroad; more regulation from local, state and federal agencies; etc.
Though risk cannot be eliminated, it can be reduced. To lessen the risk of failing in this ever competitive environment, buying a franchise has become an attractive alternative to starting a business from scratch. Franchises are, in fact, one of the fastest growing segments of the business community. According to the International Franchise Association, it is estimated that a new franchise opens in the United States every 16 minutes.
Why are franchises such an attractive alternative for many. To understand this, you should understand just what a franchise is, what the concept can and cannot do for you, and what you should look out for if you are interested in investing in a franchise. This article will discuss these issues in an attempt to better equip you to determine whether or not a franchise is right for you.
A franchise is essentially a license to use a product or marketing concept, or both. There are two parties to any franchise arrangement: the franchisor and the franchisee. The franchisor is generally one who, from experience, has developed a business to the point that it can be marketed by others.
Rather than expanding on their own and expending their own resources in such expansion, the franchisor offers to allow others, known as franchisees, to essentially open a similar business with the help of the franchisor. In exchange for the permission to use the franchisor's ideas, the franchisee pays a franchise fee, and a royalty, generally based upon a percentage of the gross income of the franchisee's business. In addition, the franchisee can expect to pay an additional sum to defray the franchisor's advertising expenses.
A franchise differs from other business opportunities because, in theory, you should not have to start from square one to open your business. In starting a business, there are many factors to consider, such as what to name the business, where the business should be located, how will your business fare in relation to other similar businesses, how much product to buy, etc. In addition, unless you have extensive experience in running the type of business you intend to open, you will need to get training in management skills and in producing (if you intend to manufacture a particular product) or in obtaining the product you intend to sell (if you intend to open a retail establishment).
A good franchisor should be able to provide you with all of the basics you will need to open your business. It should be able to provide you with training in all aspects of your franchise operation, not just give you the right to use its name. This assistance should include, at minimum:
The franchisor should not only assist you when you initially purchase and open your franchise, but should also continue to help you with regular product updates, advertising ideas and the like. It should be a truly symbiotic relationship; the franchisor trains and supports the franchisee, while the franchisee pays a fair fee for this assistance.
There are many franchises available, both established (i.e., McDonald's, Postal Instant Press, etc.) and new, selling popular items and services. Naturally, the more established and successful the franchisor, the higher the franchise fee, with franchise fees ranging from $20,000.00 and up. Furthermore, you can expect to pay a monthly royalty of at least 3% of your gross income and an additional royalty of at least 2% of your gross income to help defray the franchisor's advertising costs.
As can be seen, the amounts to be paid to the franchisor are sizable. You should thus approach your investment in a franchise with great caution.
State law requires that prior to purchasing a franchise, the franchisor provide the prospective franchisee with a written prospectus outlining certain aspects of the franchise operation including the principals of the franchisor, an audited financial statement of the franchisor, whether the franchisor is involved in any legal actions, among other information. Though the state requires a prospectus to be provided, it does not pass on the truthfulness of the information contained in the prospectus.
State law also requires that the franchisor wait 36 hours between the time a prospectus is delivered and the franchise fee being paid. This is to allow a cooling off period for the prospective franchisee.
Although most franchisors are sincere in their marketing brochures and in the required prospectus, some take liberties in the information they include in these items, as well as in discussions with a prospective franchisee. Because of this, as well as the large sum of monies you can expect to pay to the franchisor, a thorough investigation of the franchisor is in order.
It is recommended that prior to investing in a franchise, you should:
An investment in any business is a time consuming and expensive proposition. It requires much homework and hard work to be successful. The purchase of a franchise is an equally expensive proposition in terms of your time and of your hard earned money. Remember, you will not only be paying the regular operating expenses involved in running your business, but will also be paying the franchise fee, royalty and advertising royalty, all of which may add up to a large amount you will be paying to the franchisor. Thus, it is imperative that you thoroughly investigate any potential in a franchise and, once you have completed your investigation, ask yourself if the franchise still seems to be a good investment to you.
Darryl Horowitt, Esq., has conducted all phases of litigation in the areas of Banking, Business Disputes, Securities Fraud (class action and individual), Construction, Real Estate, Environmental, Casualty Insurance Defense, Personal Injury and Commercial Collections, from initial client contact to settlement, mediation, arbitration and trial - court and jury (State and Federal Court) and administrative proceedings (before the United States Environmental Protection Agency, Department of Agriculture, National Labor Relations Board, California Department of Fair Housing and Employment, Worker's Compensation Appeals Board and Agricultural Labor Relations Board).
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