Ten Things Investors Should Know
By The International Franchise Association
First and foremost, a thorough plan for investigation should be made prior to signing a franchise agreement. Knowing the scope and size of the industry is particularly useful for those who are just beginning, considering that between 2003 and 2005, nearly 900 new concepts began franchising according to an International Franchise Association Educational Foundation study.
1: A Thorough Investigation
Franchisee-candidates have a wide range of opportunities in more than 80 business categories, in investment ranges from as low as $10,000 to more than $1 million, and in business formats of all shapes and sizes. The concepts range from those related to health, art education, hotels, personnel services, real estate, tax preparation, travel, maintenance, and construction.
Prospective investors should prepare for a detailed investigation that includes, but is not limited to, talking to franchise experts, consulting family and friends, researching companies, checking finances, and reading the latest research about franchising on the association’s Web site, www.franchise.org.
2: The Basics of Franchising
The preliminary stages of the investigative process can be quite overwhelming. The International Franchise Association (IFA), founded nearly 50 years ago to promote franchising worldwide, provides a free, online course, “Franchising Basics,” in addition to other resources to aid prospective investors.
Also available on the association’s web site, www.franchise.org, is the Federal Trade Commission’s Consumer Guide to Buying a Franchise. To help prospective investors find the franchise that best suits their interests and capabilities, the IFA offers its Franchise Opportunities Guide which allows readers to review information about IFA-member companies by investment level, category and alphabetically by name.
3, 4, 5: Money, Money, Money
The fees and expenses for buying a franchise vary from company to company based on the area where the franchise is located, equipment needed, number of employees required and other fixed costs, initial fees, and royalties. From commercial bank loans to independent financial specialists to U.S. Small Business Administration programs to direct financing which many franchise systems offer, all franchisees have many options in choosing the appropriate loan to meet their needs.
6: The Franchise Disclosure Document
Franchise companies are required to present prospective franchisees with a franchise disclosure document 14 calendar days before any signing or payment can occur. The document includes the use of a standardized format to display a wide variety of information, ranging from the experience of company officers to financing, litigation, the network of franchises and the terms of the franchise agreement. The objective of the document is to protect prospective franchisees from fraudulent offers, while ensuring that they are well-informed of their obligations.
7: Attorneys and Accountants Knowledgeable In Franchising
Because the franchise disclosure document is often quite lengthy and sometimes difficult to fully understand, it is important for prospective franchisees to seek the assistance of attorneys and accountants experienced in franchising. The IFA Supplier Forum consists of firms that provide goods and services targeted to the franchising industry, many of which are attorneys and accountants. For a complete listing, visit www.franchise.org.
8: Current and Former Franchisees
Some of the best resources available when it comes to assessing different companies are current and former franchisees. The franchise disclosure document is required to contain the contact information for current owner-operators and some who are no longer associated with the company. Communicating with such individuals can inform potential investors of the day-to-day operations and how the franchisees feel about their relationship with the franchisor.
9: Company Executives
The franchise systems want their franchisees to succeed. A franchisor (company) can’t be successful without having successful franchisees, and franchisees can’t be successful without a successful franchisor. It is important for those potential franchisees to get to know those who are a part of their main support system. What also might be helpful is to determine the background and experience levels of the company professionals in charge of managing the system.
10: Self-Examination When Buying a Franchise
A thorough self-examination is as necessary as investigating the franchise companies themselves. Franchising is not risk free. There are no guarantees of success and not every individual with entrepreneurial interests is best suited for this business format. There is not much room for personal creativity since franchisees are buying into someone else’s idea and business model. Those hesitant to commit to the structure and restrictions of franchising might want to pursue other types of business. HBM
For more information about franchising, visit the International Franchise Association’s Web site, www.franchise.org.
