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Things To Consider When Starting A Franchise

Dec 31, 2007
There are a number of questions an entrepreneur should ask himself before buying a franchise. As with any new business venture, you should carefully weigh all your options before starting a franchise. This article will cover some of the many issues that should concern a potential franchisee.

Financial Considerations

First and foremost, do you have the necessary financial resources to buy a franchise? If the answer is "no," you will need to decide where you will get your start-up capital. Should your initial financing be proven insufficient, do you have alternate financing resources? These could include friends and relatives who might be able to lend you money. You should also be prepared to make financial sacrifices in order to get your new business off the ground.

The potential loss of company benefits such as health insurance and retirement plans should be significantly outweighed by the monetary and self-satisfaction rewards that you anticipate receiving from your franchise business. Additionally, you will need enough money in savings to provide you and your family a one-year "cushion." This allows your business a one-year period to break even. Most new businesses do not break even for at least one year, and franchises are no exception. You need to be aware of this fact. And, for this reason, you will also need to decide whether you will retain your current occupation while your franchise is in this pre-profit stage.

In preparation for buying a franchise, you should compile a written balance sheet that details all of your assets and liabilities including liquid cash.

Finally, if applicable, your spouse should be in total agreement with your business plan. Starting a business is a difficult task to undertake - one that requires the support of friends and family. Your spouse should be fully apprised of the financial challenges that can be involved with buying a franchise business, and he or she should be willing to take on these challenges.

Personal Considerations

Starting a new business involves long hours and countless administrative duties. You and your spouse should be certain that you will be physically and emotionally capable of handling this. Potential franchisees also need to consider who else will be affected by their long working hours. For example, do you have small children who will be negatively impacted by your frequent absence?

After thorough research on your selected franchise, you should be reasonably certain that it is a business you will enjoy operating for a number of years - or even until retirement.

Anyone considering buying a franchise needs to realistically asses his own personality. Do you enjoy working with others? Do you have the skill sets necessary to work effectively with a franchisor as well as your employees and patrons? After answering these questions yourself, consider asking friends and family for their truthful answers.

Another important question many aspiring business owners may overlook is this: Is there someone who is both willing and able to run the business should you become incapacitated by illness or anything else?

Business Considerations
Do you have previous experience in the industry of the franchise you wish to purchase, and, if not, have you considered working in this type of business before committing to buying a franchise?

You should conduct copious independent research once you have selected a franchise. You'll want to look at things like the background and experience of the franchisor and whether the product or service you aim to sell has a market in your area. In addition to whether a market currently exists, you'll want to consider what that market will be like in five years time. You should also research what competition (if any) exists in your proposed territory. Your research should include competing franchise and non-franchise businesses.

Other Considerations
You must perform the essential task of preparing a business plan for your selected franchise that details all your research and projections.

Keep in mind that you will need the help of other professionals such as a franchise attorney who can evaluate your franchise contract and (once you open your business) an experienced accountant who can help you maintain accurate financial records.

Information to obtain from the franchisor
Once you become interested in a specific franchise, there is a wealth of information with which you should ask the franchisor to provide you.

For example, will your franchise agreement give you an exclusive territory for the length of the agreement, or will the franchisor be permitted to sell additional franchises in your area? Will you be given the right of first refusal in adjacent territories? You will need to determine whether the franchisor will sublet space to you or assist you in selecting a location for your franchise.

You should find out if you will be required to lease fixtures, signs or equipment from the franchise, and, if so, whether the prices are reasonable. You should ask whether the franchisor provides in-house financing and what the terms are. Additionally, find out whether any fees beyond those discussed in the offering circular are required of franchisees.

Consider what information you've received and how forthcoming the franchisor has been with that information. Have you been given data on actual, average or forecasted sales, profits or earnings? Have you been told the success rates of other existing franchisees, and was the franchisor willing to provide you with their names and locations? Refusal or reluctance to provide this type of information is often a red flag.

Once all of these issues have been addressed, and you still want to move forward, there are still more questions that you as a prospective franchisee should have answered:

For example, are there any variances permitted by the franchisor in franchise agreements. If so, what is their nature? You need to find out if you'll be compensated for the goodwill you build into the business if you decide to sell your franchise back to the franchisor under the right of first refusal.

When you open for business, will there be any restrictions on what items you may sell, and, if so, what are they? You'll need to find out whether you'll be able to use any federally registered trademarks, service marks, trade names, logotypes and/or symbols that the franchisor may possess without reservation. If not, you should have a clear understanding of what the applicable exceptions and conditions are. You should also ask whether the franchisor owns patents or copyrights on equipment you'll be using or products you'll be selling. Additionally, find out whether any endorsement agreements with celebrities are in place for advertising purposes and what the terms of those agreements are.

Consider the franchisor's reputation. Is it one of honesty and fair dealing? Has the franchisor met all the requirements of FTC and state disclosure laws? And, do you feel that the franchisor has investigated you thoroughly enough to be reasonably certain that entering into a franchise agreement with you will be mutually beneficial?

Final Thoughts

Of course, this is not an exhaustive list of research topics, and you may find that there are questions unique to your situation that need to be answered.

The bottom line is this: On the day that you sign your franchise agreement, you should feel confident that all your questions have been satisfactorily answered, and all your concerns have been adequately addressed.
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