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You are here: Information Center >> Small Business >> Buying a Franchise

Buying a Franchise

For many people, buying a franchise is just the right blend of entrepreneurship and predictability. They have the opportunity to run their own operation, yet have the guidance and knowledge of an ongoing business organization.

Nearly one-third of the United States’ retail trade is conducted through franchising. Industries from fast food restaurants to health clubs to carpet cleaning are involved in franchising. If you are considering purchasing a franchise, talk with an attorney who specializes in the field. The franchise agreement is drafted in favor of the franchisor. It is not uncommon for a franchisee to find himself or herself with little or no recourse if the franchise does not work out.

How do I distinguish between an actual franchise and a simple business opportunity?

A franchise requires:

  • the use of the seller’s trade name or trademark;
  • payment for the use of that trade name or trademark; and
  • an agreement giving the seller certain controls (for example, you must use packaging they provide rather than less expensive packaging that you find on your own).

Why should I consider getting into business with a franchise?

For one thing, you may already have had a personal experience with the franchise. If you buy a hamburger at McDonald’s® or a muffler from Meineke, you may be patronizing a franchise. In other words, a franchise can be more of a known quantity than a startup or an ongoing, but nonfranchised, business.

What should I expect from the franchisor?

You should get a complete business package from the franchisor—a product, a business plan, advertising and marketing support, processes and site selection.

What are the advantages?

Strong franchises have a high success rate, and it is in the franchisor’s interest for you to succeed at the business.

TIP: According to the U.S. Small Business Administration, approximately 35 percent of new business startups fail in their first year. However, after 5 years, approximately 90 percent of all franchises are still in business.

Besides the advantages that come with the complete business package, financing may be easier. The franchisor may provide financing. Or if you go to a bank or other lender, they may be more willing to provide financing, since they are familiar with the franchisor.

What if I do not have much experience in the business?

That is one of the best advantages of franchising. You will most likely have a chance for a thorough training program.

How do I know I am signing up with a reputable franchise?

You should be cautious if the company is using high-pressure sales tactics, promises huge and immediate returns on your investment and does not have a structure in place for assistance and training.

TIP: Avoid franchise "seminars" where you are encouraged to "sign up before the opportunity is lost" at a so-called special price. These opportunities typically require the buyer to sign up very quickly before the "discounted" price of the opportunity expires. A reputable franchise will not rush the buyer.

Where can I get information about buying a franchise?

The SBA’s Web site, http://www.sba.gov/starting_business/startup/franchise.html, provides answers to many basic questions concerning a franchise purchase.

How are franchisors regulated?

The Federal Trade Commission oversees franchising at the national level. When you first begin talking with a prospective franchisor, you should be provided with offering documents that outline information about the franchise. These have now been standardized into the Uniform Franchise Offering Circular (UFOC).

What is included in the Uniform Franchise Offering Circular?

The UFOC includes a company history, financial statements, fees that will be required, description of quality controls and information about ending or renewing the contract.

So are all franchise contracts the same?

Each franchise agreement will be different. As mentioned, you will be expected to pay an initial franchise fee and a royalty fee and most likely make a contribution to a pooled advertising-marketing program. You may be required to buy your supplies from the franchisor. And you will need to follow many operating requirements set down by the franchisor.

What kind of fees can I expect?

There are several types of fees that your franchisor will expect. The first one due is called the franchise fee, which essentially buys your license or right to the products and bundle of services that you are buying.

On an ongoing basis, you will likely be expected to pay two other fees. The first, usually figured as a percent of sales, is a royalty fee. Second, you will be asked to contribute to a cooperative advertising and marketing program. The franchisor will probably make the decisions regarding the publicity program, and your business will have access to major media that a stand-alone small business could never hope to have.

Do I need a franchise attorney?

All franchises must comply with complicated state and federal regulations. An attorney that specializes in franchise law will protect your interests and make sure you do not violate any laws.

Due Diligence

Just as you would thoroughly investigate an independent business before you make the purchase, you will want to check out the franchisor. Look for overall reputation, financial strength and desirable products and services. Find out what the rate of growth is overall and whether they are growing at a rate that is reasonable.

Be sure to check with other franchisees for their views on the business. You can request a list of references from the franchisor.

What are some disadvantages of buying a franchise?

For starters, franchises are not cheap. You will spend a lot of money for the initial purchase of the business. In addition to the initial outlay of money, you will be paying the franchisor on an ongoing basis for royalties, advertising costs and more. You will not have much wiggle room with the franchise agreement. If you are an entrepreneur who likes to do things your way, you may find answering to the franchisor’s demands too restrictive. You may also find it difficult to sell your franchise if things do not work out. In some cases, the franchisor has the right to approve or disapprove of a potential buyer.