A franchise business can be simply explained as an arrangement where a successful business sells the right to use its business model to other entrepreneurs for a sum of money. Though Wikipedia states that the word franchise originated from the Anglo-French word ‘franc’ which meant free, a franchise business model is never ever given away for free.
You already know of many top franchise businesses like McDonalds, KFC, Pizza Hut etc. If you have the financial resources, you can start you own franchise business. But before you can do that, you have to know certain facts, tips and procedures that are involved in this business.
Things to Do Before Starting Your Franchise Business
Before you settle on your decision to start a franchise business, you will need to evaluate the following things:
- Your Financial Resources
- Your Ability to Handle the Business
- Your Target in Doing this Business
Make sure that all the 3 things above match the requirements of the franchise business that you are planning to pursue.
Factors to Evaluate in Selecting a Franchise Business
When you are short listing the franchise business that you plan to buy, you have to use certain evaluation criteria to separate the wheat from the chaff. Here are the important criteria:
- Popularity of the business model
- How long has the Franchisor been in business?
- Does the business have many franchise outlets, nationally and internationally?
- What is the public impression of the business model?
- Has this business ever been in media spotlight for lawsuits, consumer complaints or any such controversies?
- Demand for the product / service offered by the franchise
- Operating costs and resources
- Local competition with other franchise owners of same business / related ones
- Will franchisor give training and consistent support?
- Can you handle the business with your current skills/ would you need formal training?
Should You Use A Franchise Broker?
If you are a first time entrepreneur and lack experience in dealing and evaluating business models and in deciding their viability, you can always seek the professional assistance of franchise brokers. Though you will need to shell out some extra money if you hire a franchise broker, their advice may be worth the money spent.
The best way to strike a deal with a franchise broker is to show him / her, a clear picture of your financial resources; targets and business expectations beforehand. Doing so will make it easier for them to find a franchise business that best matches your needs.
But there always lurks the danger of being misled by these franchise brokers, because it is obvious that they receive a sales commission from the franchisor for every successful sale.
The best solution to this is to strike a fine balance between the broker’s suggestions and your own research findings about successful and viable franchise business models.
Legal Requirements in Starting a Franchise
After finalizing your choice of the franchise model, you will have to go through crucial documentation and legal processes, before you can actually own this franchise opportunity. The first step begins with the disclosure document. The Federal Trade Commission (FTC) enforces a right to receive the disclosure document at least 14 days before you sign a contract or pay any money to the franchisor.
What Should You Note in the Disclosure Document?
It is better to consult a legal professional to look through the disclosure document for verifying the legal viability of the business. In case you want to do it on your own, following points must be noted:
- Permits / Licenses Needed to Do this Business
- Litigation History of the Franchisor
- History of filing for bankruptcy
- Costs involved in setting up the business for the franchise owner (includes all costs like employee salary, equipments, maintenance charges, business promotion, legal fees, royalty etc)
- Any legal restrictions about sale of the products/ services, purchase of the raw material or goods etc
- Training (Who will pay for training, who conducts training, will new employees be trained etc)
- Advertising and promotion (what percentage is kept aside for advertising; who will pay, any legal restrictions on advertising etc)
- List of Franchisees (current and former)
Do Your Own Research
After the disclosure document is verified to be okay, you can still ask for more info about the franchisor
- From banks (to get an unbiased financial profile of the franchisor)
- From Better Business Bureau (BBB)
- Government (Office of the Attorney General / State office that regulates franchising)
For More Resources on laws pertaining to franchise, please visit www.ftc.gov
A franchise business is an effective solution to starting your own business without having to worry about a successful business model. If you have the resources and simply want an automated business model that goes something like “invest, start business, earn profits” then franchise business is the one for you. Hope this post simplifies everything and provides a valuable resource to you in starting your franchise business.
Category: Small business