Buying A Franchise Is Serious Business_Tiare Rath

Buying a franchise is a dream for many aspiring small-business owners.

There are conflicting opinions as to whether franchises tend to be more successful than independent small businesses, but this much is clear: Franchises are expensive to buy, carry the same risks as any startup business and require plenty of sweat equity to make them profitable.

"Buying a franchise is a serious, serious business, and one should contemplate the downside," says George Naddaff, chairman of the KnowFat! chain of restaurants, who created franchises including Boston Market and Sylvan Learning Centers. "The danger … is that every franchise is a startup."

Franchising allows entrepreneurs to take advantage of a proven business model and do business under a brand name that already enjoys market recognition and a loyal customer following.

As a franchise owner you will probably get support from your franchisor, which is one advantage over owning an independent business. This often includes access to reputable suppliers as well as operational and marketing support, including national campaigns and regionally tailored promotional materials. But just how much support your franchisor gives and what your investment costs will be are two of the many questions you should ask before buying a franchise.

Do Your Homework

Franchisors must provide prospective franchise owners with the company's uniform franchise offering circular. This thick document details important aspects of the business, such as the number of franchisees, financial statements and litigation history.

You should read the uniform franchise offering circular thoroughly. Naddaff advises calling franchise owners that are listed in the circular to ask about their store financials and their relationships with the franchisor.

Franchisors are only required to provide the circular, which will also outline the services you'll receive for the initial fees you'll pay to the company. Franchisors are not required to provide you with such services as advertising, training or access to financing. The services and relationship with the franchisor depends on each company, but many franchisors will provide these services and more, depending on their policies.

The circular will also tell you about the company's management, an important consideration when buying a franchise. Take a close look at the level of turnover, any recent management changes and the business styles and histories of the top executives.

Know Yourself

You should have solid credit and cash before buying a franchise so that you know how much you can pay for the initial operating costs and fees. You should also know the industries that interest you and why.

Make sure that your personality “is one that fits,” Naddaff says. "Everybody should play to their strengths."

Naddaff has seen many entrepreneurs in their early 40s who turn to franchising because they're tired of the corporate grind or having a boss. But owning a franchise doesn't completely eliminate supervision. Check the franchisor's rules carefully and determine whether you are comfortable with the creative and other restrictions on operating your franchise.

If you already own your own business, you may be an especially appealing candidate, as you likely already have the needed resources in place, including property, personnel and clientele, as well as know-how and a proven track record, which means you can quickly be up to speed and generating income.

However, some franchisors may be wary of getting involved with an experienced business owner who long ago forged opinions and about how best to operate – opinions that may not mesh and might even clash with how the franchisor prefers to do business.

Know the Costs

There are a number of costs associated with acquiring and starting up a franchise.

1. Initial Investment Fees

You will probably need to pay initial fees to your franchisor. The median initial investment cost in 2006 was $25,150, according to the International Franchise Association. About 75 percent of businesses have set initial fees, while 25 percent have ranges for the fees, the association reports.

The National Federation of Businesses says most franchisors expect you to pay one-third of the fees in cash. The rest can be financed through the franchisor or on your own. Franchisors may help you get loans through their financial institutions.

The fee allows you to use the brand name, and often includes training, marketing and other services. The franchisor will determine what exactly the fees cover.

2. Startup Costs

You may still need to buy or lease a property, which is usually the largest cost for franchises, purchase equipment and hire staff. These are traditional startup costs for any small business and can also apply to franchises.

3. Royalty Fees

You'll need to continue paying a percentage of your income to your franchisor for the right to use the brand. This fee can range from 4 percent to 12 percent, Naddaff says, and can also be used by the company to help your store with marketing and promotions or to have corporate site visits.

On its Web guide for buying a franchise, the Federal Trade Commission notes that "even if the franchisor fails to provide promised support services, you still may have to pay royalties for the duration of your franchise agreement." Before buying a franchise, be sure to ask franchise owners about the services and support they've received from their royalty fees.

4. Additional Costs

You'll be responsible for ongoing operating costs such as payroll. You also may have to pay for your own advertising, depending on the services your franchisor bundles into the agreement.

Research the Market

Franchises shouldn't be too young, nor should they be too well-established. If a franchise is either, you may be heading into a risky investment.

"You can be too soon on something or too late," Naddaff warns. "So I try to find things on the cutting edge."

Think American coffeehouses are booming? So do other companies, which is why the market has already been tapped, Naddaff says. He sees more growth in restaurants offering health and ethnic foods.

Find out what's missing in your community and how similar businesses are performing in comparable communities.

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Reference :

- http://sbinformation.about.com/od/franchise/a/franchisebuy.htm?nl=1