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There are many reasons why franchising is the best type of operation for the majority of first-time business owners. Most revolve around the increased probability that the business will succeed and provide profits to the owner in a shorter time frame than an independent business. This allows the owner to address her or his personal goals both financially and personally.

The following process will help you avoid mistakes made by many other people buying into a franchise. The steps which are explained will assist you in buying into a franchise or selecting a home based business that is a suitable match for you and has the potential for financial success.

STEP 1 - Examine your Opportunities

You will want to use a franchise business directory to contact and compare all possible franchise choices. The franchise research you will gain from a franchising directory will allow you to review the costs and benefits for each franchisor. You will probably want to narrow the possible alternatives to a finalist group of no more than five. This group of finalists should represent those that you want to consider seriously.

Research the best franchises.  There are thousands of different business franchises, and there will be more than one and perhaps many in your chosen business area.  Look at the alternatives. Ask existing franchisees. Ask customers. Read the franchise trade magazines, newspapers and websites. Attend franchising exhibitions. Do some local market research to gauge demand for the products and services, to test the reputation of the franchising companies, and to test their claims about pricing and any other relevant business claims or information you've been given.

STEP 2 - Identify your Skills and Interest to target an appropriate Franchise

Choose a franchise business that you'll enjoy! If you have a design background, a sign-making franchise would match your skill set. If you don't even like to pump gas, stay away from an oil-change franchise.  Being an expert and a specialist at what you do is essential to running any successful business - enjoyment and expertise naturally go hand-in-hand.

Trust your instincts.  When you buy a business franchise of any sort you are entering into a business partnership, in which your relationship with the franchisor and their people will be absolutely crucial to your success.  If you feel uncomfortable during the selection and recruitment stage it is likely that there are grounds for concern. Feeling uncomfortable about trust and relationships may not necessarily mean that the franchisor is untrustworthy, but it does probably mean that the 'fit' may not be right for you.  Trust your instincts to tell you whether the franchising company has a similar value system and philosophy to your own

STEP 3 - Examine the Franchise

It is important to obtain a thorough financial disclosure statement from your franchisor.  The financial seller disclosure statement is sometimes referred to as a Uniform Franchise Offering Circular (UFOC). The following list contains the twenty items of information that must be in your Uniform Franchise Offering Circular statement.

The seller disclosure statement must include:

  • Information identifying the franchisor and its affiliates and describing their business experience.
  • Information identifying and describing the business experience of each of the franchisor's officers, directors and management personnel responsible for franchise services, training and other aspects of the franchise program.
  • Information about any previous bankruptcies in which the franchisor and its officers, directors and management personnel have been involved.
  • A description of the franchise agreement conditions under which the franchise may be repurchased or refused renewal by the franchisor, transferred to a third party by the franchisee, and terminated or modified by either party.
  • A description of the continuing payments franchisees are required to make after the franchise opens.
    Information about any restrictions on the quality of goods and services used in the franchise and where they may be purchased, including restrictions requiring purchases from the franchisor or its affiliates.
  • A description of any assistance available from the franchisor or its affiliates in financing the purchase of the franchise.
  • Descriptions of restrictions on the goods or services franchisees are permitted to sell.
  • A description of any restrictions on the customers with whom franchisees may deal.
  • A description of any territorial protection that will be granted to the franchisees.
  • A description of the training programs provided to franchisees.
  • A description of the involvement of any celebrities or public figures in the franchise.
  • A description of any assistance in selecting a site for the franchise that will be provided by the franchisor.
  • Statistical information about the present number of franchises, the number of franchisees projected for the future, the number of franchises terminated the number of franchises the franchisor has decided not to renew and the number of franchises repurchased in the past.
  • The financial statements of the franchisors. 
  • A description of the extent to which franchisees must personally participate in the operation of the franchise.
  • Statistical information about the present number of franchises, the number of franchisees projected for the future, the number of franchises terminated the number of franchises the franchisor has decided not to renew and the number of franchises repurchased in the past.
  • A description of the extent to which franchisees must personally participate in the operation of the franchise.
  • A complete statement of the basis for any earnings claims made to the franchisee, including the percentage of existing franchises that have actually achieved the results that are claimed.
  • A list of the names and addresses of other franchisees.

A franchisor may want to conduct a preliminary approval of you before providing this information. The law stipulates that the information must be provided before you sign a franchise agreement.

STEP 4 - Investigate the Franchisor

It is important for you to investigate the franchisor thoroughly. You wouldn't want to become a partner with someone you didn't know or trust. Consider your relationship with the franchisor a partnership and check the franchisor out completely.

Investigate how long the business has been around. Many franchises have surprisingly short life spans. Think of all the frozen yogurt joints and muffin shops that have gone belly-up. Assess whether a franchise is riding out a short-term fad or is part of a trend, like Dunkin' Donuts, that's here to stay.  Information from sources such as the Better Business Bureau and Dunn and Bradstreet can tell you a great deal about the franchisor.

Find out how you will be supported. Will the franchise help with ads, bookkeeping and personnel matters? Ask how much training the parent company offers and what it involves.  When you start a new franchise business, the franchisor has a training program already in place to familiarize you with the product and/or service, along with the franchise's way of doing business. A franchisor training program is one of the major benefits of franchising. It lets you acquire skills rapidly through the initial training program, and then gives on-site and ongoing training to reinforce those skills. 

Look for a good business profit model.  Successful businesses - not just franchises - are always based on a sound and healthy business and profit model.  The better the profit model then generally the easier it is to start up, run and maintain a successful business. 

Talk with franchisees about their experience. The disclosure statement is required to have a list of franchisees. Pick a group of franchisees at random to contact.

Seek the advice of professionals about the franchisor and franchise agreement. Three professionals that you should definitely confer with are an attorney, an accountant and a banker.

STEP 5 - Understand the Financials

Put your financial affairs in order. Most franchises will want to see evidence of your financial security or business experience before selling you a franchise. 

Determine how much cash you have to invest up front in such a venture. Some franchises may be out of your league simply based on the required down payment. Setting up a McDonald's, for example, costs nearly $1 million, while Chem-Dry only asks for $7,950 down.  Find out if additional capital investments will be needed down the line in order to be profitable, or if the start-up costs are the only major investment.

Ask your banker or attorney if they've heard anything--positive or negative--about the franchise. 

Ask what the franchise fee covers. Some investments pay for all start-up costs, while others don't include training and marketing, to keep the stated up-front cost low. 

Find out about supplies and equipment. Some franchises require that you buy almost everything you need from them. Be sure the rates are reasonable and competitive with other sources. 

STEP 6 - Make a Decision

As with all decisions, this is usually easier said than done. Many questions have been presented above which need to be investigated. Sometimes you will discover positive facts about a franchise, and sometimes you will discover negative facts.

These steps of selecting a franchise were designed to provide a basic introduction to the concept of franchising, including its advantages and disadvantages. This information should help guide you in your decision-making process about purchasing a franchise.

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