Franchise Information Franchises -- Advantages and Disadvantages Tip! If you are interested in small business franchises to start your own company, there are some that are forecasted to see significant growth over the next few years. You need to look closely at your interests, the time you have to offer, and the amount you want to spend on a small business franchise before you determine which one is best for you. Want to own your own business? Don't want to start from scratch? Franchises are a way to get into business quickly, with a brand name, proven methods of operation and a support structure. Franchises are everywhere. Familiar names include Dunkin' Donuts, Curves, Mail Boxes Etc. and McDonalds, to name a few. "Buying" a franchise is legally complicated. As a franchisee, you pay money for the right to use the franchisor's Trademarks, systems and methods. Many franchises are legitimate and successful. Unfortunately, there has been a history of problems with franchises. As a result, franchising is heavily regulated at both the state and federal levels. The legally required franchise documents are intended to provide full disclosure to the prospective purchaser. In reality, the franchise documents are voluminous, full of legalese, extremely one-sided in favor of the franchisor, and packed with restrictions and fees. Advantages of buying a franchise include: - Quick startup - Help with site selection - Brand name and recognition in the marketplace - Training and support - Customized accounting system - Exclusive territory - Marketing assistance - Access to markets and suppliers Disadvantages of buying a franchise include: - Up-front fees (substantial initial investment required) - Ongoing fees (usually royalty payment is a percentage of revenues) - Fees for marketing and related services - Restrictions on activities (you can only offer approved franchise products and services) - Monitoring (the franchisor monitors your books, bank accounts and operations) - Termination criteria - Renewal requirements and fees - Restrictions on transfer A franchise is a major investment. It's important to carefully investigate the opportunity. A common misconception is that franchises are really "turnkey" operations. Purchasers think that they just "buy" the franchise and it runs itself. This is incorrect. It's important to clearly understand what you are buying, how hard you will have to work and what income is realistic. Here are some tips to evaluate a franchise opportunity: 1. Check to see if there are lawsuits against the franchisor. Litigation is required to be disclosed in the franchise documents. This will give you important information about what's gone wrong for others. 2. Talk to/visit existing franchise owners. There should be a list of existing franchise owners in the franchise documents. You can stop by and visit as a customer, and observe their operations. You can also call up and ask questions, such as: - Are you satisfied? - Did you receive the support promised? - Were there any surprises? - Have there been any problems? - How were the problems resolved? - Are you making the money you expected? - Can I visit and observe your operations? 3. What are the fees? Franchise terms vary. It's important to understand the fees. Make a list of fees: - What's included with the initial franchise fee? - What's the royalty? Is it a percent of "gross" or "net" sales? - Is the royalty a fixed percentage or does it decline over time? - Are there service fees? Training fees? Marketing fees? Advertising fees? Tip! A lot of people falsely think that buying computer franchises guarantees a winning business situation. But before you make the decision to buy, you need to consider important things like the demand for your produce and service, the competition you will face, whether you are able to run the business, the popularity of the name and the growth opportunity for the company. 4. What's your territory? Draw a map with clear boundaries: - What is your defined geographic territory? - How close can another franchise like yours be located relative to your location? 5. What's your competitive advantage? - What sets this franchise apart? - Does the franchise include key technology or methods? - Can it be easily copied? 6. What are the restrictions? - Are you limited as to what you can sell? - Are you required to buy from specific suppliers? - What are the reasons for termination? - What is the scope/term of the non-compete? - What are the requirements for renewal? - Can you transfer ownership? In conclusion, buying a franchise may or may not be a good choice for you. Before signing a franchise agreement, check it out carefully and make sure you understand what the documents say. The advice of a business attorney knowledgeable about franchises can help you understand the legalese and make an informed decision. Tip! Computer franchises can be found everywhere in the country. Because risks are a part of investment in computer franchises, you want to make sure you consider all factors to make sure you are completely prepared for all the challenges. Jean Sifleet is a practical and experienced business attorney whose career spans many years in large multi-national corporations and includes three successful entrepreneurial ventures. Jean has extensive experience in dealing with intellectual property matters in the large and small companies and as a small business owner. She has authored numerous books and publications on avoiding legal pitfalls in doing business. This article is excerpted from her new book, Advantage IP - Profit from Your Great Ideas (Infinity 2005). For more information, Jean's website is http://www.smartfast.com