This page contains frequently asked questions about franchising a business in the North Texas area.
NOTE: Experiences and opinions vary among business advisors and writers. Also, the rules, laws and practices in different jurisdictions are subject to variation. It is therefore important that you verify the information presented here with local sources before you rely on it for important business decision making. Verification and further information can be obtained from your local SBDC,
local accountants and attorneys, county and state business assistance agencies and offices, libraries, colleges and universities, and recently published materials.
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Should I buy a franchise?
Read these questions and answers,
do your research and you will have your answer!
How should I research a franchise?
Begin with the information
provided by the franchiser
. Get everything they will give you. Study it
. Question it. Compare it
Contact other franchisees that presently have that franchise and ask them pointed questions about their experiences with
. If possible, contact
to learn why they no longer work with the franchiser.
Take your information and
analysis to advisors and confer with them about what you have learned. A
CPA, lawyer, Small Business Development Center advisor,
SCORE volunteer, banker, or anyone else whose business judgment you trust, can be a
valuable sounding board for you.
Look for information about
the industry and the specific business from sources other than the
franchiser. Trade magazines, suppliers of the business, libraries, Small Business Development Centers, and other research aids can
help you get a more objective look at the franchise opportunity. Compare what you learn from these sources with what you are being told by
the franchiser. Evaluate the promotional literature from the franchiser
against this non-promotional, more objective data.
prospective purchase of this franchise against alternative ways of getting into this type
of business. Would it be better or worse to start this business without the aid of the
franchise? Would it pay you to buy a similar business that is not franchise connected?
In the later stages of your research, study and thoroughly understand the franchise agreement
that you will sign if you decide to proceed. It will control your relationship with the
franchiser. What benefits, rights and obligations does it dictate for you? Can you live
with its provisions even if the relationship with the franchiser does not always go
smoothly? Here is a good place to pay for a review by a
lawyer or a CPA.
Above all, control your enthusiasm to hurry and get
started. Take your time. Study and learn
before you decide. Most of the unhappy franchisees got that way by not thoroughly
understanding the franchise relationship before they signed on the dotted line.
What is a Uniform Franchise Offering Circular (UFOC)?
This is the document supplied by the franchiser
to prospective franchisees that describes in detail the franchise offering. It should be the
focal point of the initial review
of the franchise. In the
law, it supercedes and overrules anything that is printed or
said by other franchise literature and the sales persons representing the franchiser.
In other words, if the sales person tells you one thing and the UFOC
tells you something
different, the UFOC
It is important to understand that the UFOC can be a
legal protection for the franchiser. It is often
used to defend against claims by unhappy franchisees that they were not informed or did
not understand some aspect of the franchise agreement. If it
was disclosed in the UFOC, most courts and judges have ruled that the franchisee was
informed and should have known.
The potential danger for the
franchisee is his or her lack of understanding of certain legal or
technical wording in a UFOC. Lawyers are used to draft UFOCs and lawyers sometimes
have a way of phrasing things in a way that makes them difficult to understand by the
For this reason, it is a good idea to get legal help in understanding and interpreting
UFOCs if you dont feel comfortable with them.
Should I use a lawyer when considering a franchise?
Yes. Definitely yes.
You may not need to consult
with one early on in your investigation and review of a franchise offering, but you should
definitely use one before you sign a franchise contract
The legal fee will be money well spent.
Should I use a CPA when considering a franchise?
If you are not comfortable with business numbers and business details, a
CPA can be a valuable advisor
. Since you will probably have need for the services of a CPA after you buy a
, you might as well establish that relationship before you sign
Are all franchises pretty much alike?
NO! They are not.
They are as different as night and day. Some are large, well known and well established in
the market. Others are small, unknown and not at all established in the market. As a
matter of fact, most are the latter.
While most franchise offerings tout the advantages of
franchising, such as a tested business concept and established market position,
most do not enjoy these advantages. It may be true
of a few large, established franchises, but it is not true of most franchises.
It is dangerous to generalize
about franchises. Some are good. Some are bad. Some make business success
easier, but some make it more difficult. Some will give you good support in your efforts
to establish a business and some will give you little or no support. Some are
valued and some are rip-offs. Some will rush to your aid if you have problems, but many
will dump you.
How can you generalize about something as diverse as this?
Why are some franchises so expensive and some so inexpensive?
The quick answer is, "you get what you pay for."
Franchises that cost a lot of money usually give you more. They have
tested business methods and more certain success formulas
are recognized in the market and are in demand
People know them and want to do business with them. Often you can put one up and the
people will come "just because they are there." They have been pre-sold to consumers
by the extensive
advertising, prior business, and delivery of sound values.
usually offer less of these features. They are unknown in the market and
not well tested. Often the franchiser company wants to open franchises in order to
establish a position in the market. It does not yet have a
recognized business or trade name and hopes to grow these with franchises.
It does not yet have well tested business methods,
but hopes you, as a franchisee, will help develop these methods. It does not have the capital to start multiple business locations and hopes
to use your capital, and that of other franchisees, to build a chain of businesses.
Because of the economics of franchises, most franchisees
buy the less expensive offerings. They are all that they can afford. What this means is
that most franchisees are NOT getting what is offered by the
higher priced franchises; namely, solid business systems and well established market
positions. As a result, more caution,
research and study is suggested. Failure rates are low with the high
priced, well-established franchises. They are much higher with the low priced,
Can I sell a franchise if I decide to get out of it?
Sometimes you can and sometimes you cannot without
considerable difficulty. Read carefully
Franchise Offering Circular
and the franchise agreement for the details of
how you can sell.
Some agreements require that you sell the business back to
the franchiser at a price favorable to it. Some require approval of the franchiser
approval that has various strings attached to it. Some place heavy penalties on you if you
sell. Few will allow you to sell it as easily as you would a
non-franchised business you might own.
Why is franchising so popular?
You will get different opinions about this, but the opinion
of this writer is that franchising is popular for two main
reasons: it works and it is heavily promoted.
There is no question that as a method of getting into
business, franchising works. If it
didnt, you would not see a franchise on every corner and in every industry. You
would not have hundreds of thousands of them offering everything from food to cleaning to
real estate services.
The second reason for the popularity of franchising is the heavy promotional selling that exists. Look at any
business magazine, trade publication, late-night television, and other places and you will
see an endless array of franchise offerings. It is difficult to find a business that is
not being offered as a franchise. Just about anything you
want to do in business can be started as a franchise often for little money.
Selling franchises has become a business for many. They are
not as interested in selling a product or service to the consumer as they are in selling a
franchise to YOU. That is how they make their profit. The more they sell, the more profit
The more unscrupulous
franchise businesses will even do what is called "churning" franchises.
This is the practice of doing things that encourage the turnover of franchises so they can
be resold. If the franchise is the "product" and the profit is made by selling
the "product," the more times you can sell it, the better. If a franchise that
has already been sold can be resold, that is another sale. Some
franchise companies engage in this practice to enhance their profits.
Which franchises should I avoid?
A general answer to this is to avoid those that do not
strictly fit your purposes and capabilities after thorough research by you and your
advisors. A more specific answer might be to avoid or be
weary of those franchises that exhibit the following characteristics:
- They seem more interested in selling you a franchise than in learning whether or not you are likely to
be successful in operating the franchise.
- They do not want you to talk with existing franchisees.
- They will not give you much information about their franchise.
- They require money from you before they will give you information.
- They will not give you general sales and earnings histories of their franchisees.
- There seems to be no established market demand for the product or service offered by the franchise.
- They do not seem to be respectful of you or your rights as a potential business "partner."
Do I always have to operate a franchise as the franchiser tells me?
Not always. It depends on the franchise. Some will require
you to conform to fairly rigid operating rules. Others will give you a lot of latitude to
operate the franchise as you see fit. The Uniform Franchise Offering Circular and the
franchise agreement that you will sign will outline how closely you will have to follow
How do I find out what franchises are available?
Look in business magazines and other business publications.
Check the library and Internet under "franchises." Visit your local bookstore
chain and ask about books and magazines on franchising. Watch for franchise trade shows
and fairs. Talk with your local Small Business
How do I know which franchise is best for me?
Start by writing down what
from a franchise and what
capabilities you have
in terms of money and skills. Make special note of
the kinds of business activities you think you would enjoy doing.
Then look for franchise offerings
that match your objectives. When you find one, get all the information you
can about that franchise and that type of business. Study it. If it continues to fit your
objectives, research it further. If not, discard it and go find another.
Put your final list of a few possible franchises to the severe test of in-depth scrutiny by you, your CPA, a lawyer, possibly your
banker, and any other business advisor whose judgment you trust.
Take your time and be thorough. Dont get carried away
with enthusiasm. Dont be pressured by
sales literature or a sales person. Build a good level of confidence before signing
anything or paying any money.
Will a franchise teach me how to run that business?
Sometimes yes and sometimes
. The degree and extent to which you will get training from the
franchising company will be detailed in the Uniform
Franchise Offering Circular and the franchise agreement.
carefully to find the answer to this question.
Most franchises will offer some training. Often it is
minimal and confined to procedural matters such as how to keep records and how to report
and pay fees. If it is a franchise where your operations will be highly controlled by the
franchiser, your training may be more extensive. If, on the other hand, it is a franchise
where you can do pretty much as you please, your training may be just a couple of days.
Often, this training is NOT in such
things as business management, marketing, finance, accounting, or other basic business
matters vital to the successful operations of a business.
Is it better to buy a franchise or start a business from scratch?
The answer to this is one of those "it depends"
answers. It is a question that is often asked by those interested in getting into a
business for the first time. The problem with giving an answer is that it truly does depend on you.
It depends on how much you
know about business in general and how much about a particular business
that interests you. It depends on how much you are willing
to pay someone for an established business method or established market
position. It depends on how willing you are to enter into a
long-term contract with many, detailed provisions. It depends on how well you could start this business without the help of
a franchise. It depends on what you want out of this
business. It depends on what you plan to do
with the business down the road. And the "it
depends" list goes on. I suppose the real answer to this question is
that there is no generalized answer that fits everyone.
If I buy a franchise, am I really an independent business?
This is a very good question. In a way you are, but
in many ways you are not
. Of course, different
franchises provide different degrees of independence, but to generalize, you are not as
independent as a non-franchised business.
The cost of this lesser independence may well be worth it
to you and may even be desired by you, but it is less independence nevertheless.
The franchise agreement will give you a good indication of
how independent you will be. If you are required to sell only certain products or
services, advertise in certain ways, set certain specified prices, conduct your business
according to prescribed operating manuals, and otherwise carry on your business affairs
according to someone else, you can hardly classify yourself as an independent business.
Indeed, some franchise owners have
less independence than do hired managers who have no ownership or contractual ties.
Does a franchise offering have to give me earnings estimates for a typical franchise?
No, they are not required to
give you this information. Many do not and will not, even when asked.
Some will not provide this information because it would not
help their sales effort in convincing you to buy a franchise. Others will not give it
because they want to avoid the potential liability of being sued if a particular franchise
does not measure up to their estimates.
When this information is provided, it is often watered down with qualifications that speak to the legal
issues or it is so general as to be of limited use.
Some advisors, including this writer, will tell you to
be weary if earnings estimates are not provided.
Do I always have to pay a royalty on my sales to the franchiser?
No. Royalties are not always required. The franchise
agreement will tell you what money you will have to pay to the franchiser.
Royalties should not be thought of as necessarily good or
bad. Usually, they are paid because ongoing service and support is provided to you. They
are payment for services or payment for market position.
It seems only fair that if a franchise company has spent years establishing a solid
position in the market, that you should pay something to come in and gain advantage from
Nevertheless, royalties are
an added cost of doing business and can impact your profits. In doing
financial projections, you should notice the impact of the royalty fees and ask yourself,
"Is it worth it?" Since a royalty fee is usually
paid on gross sales, it must be paid whether or not you make a profit and
whether or not you can afford to pay your other expenses.
Do I always have to buy my supplies and inventory from the franchiser?
No. Many franchise contracts do not require this. Some give
you the option of either buying from the franchiser or buying from another source. If it
is required, it will be specified in the franchise agreement
that you sign.
What do I do if I have a serious dispute with the franchiser?
The best advice is to work it
out without litigation
. You may not get your way, but if you take it to court, your chances of winning will decline.
Unfortunately, this is true even when you are in the right
and have most of the facts on your side.
Using lawyers and the courts to resolve disputes should be
a choice of last resort. It will probably
cost you even if you win. Your chances of winning are hampered by a few simple facts about
franchise disputes. These facts are:
- Most franchise agreements require you to sue in the home state of the franchiser.
- Some agreements require you to pay all attorneys fees yours and theirs.
- The franchise agreement is usually slanted in favor of the franchiser. Think of whose lawyers drafted the agreement in the first place.
- Case law in franchise matters does not favor the franchisee.
- Disclosures in the Uniform Franchise Offering Circular, which you are presumed to have read and
understood before you signed the franchise agreement, protect the franchiser from many attacks.
- The franchisers usually have more money for legal fees than do you.
- The lawyers for the franchiser are accustomed to these disputes. Your lawyer may have limited or no experience in franchise law.
If a franchiser tells me something, but does not put that in the franchise agreement, what should I do?
Ask that it be put in the agreement. If it
isnt, it has no legal effect.
Why is the franchise agreement so important?
It is the governing document
in your understanding with the franchiser. If something is not referred to in this
agreement, it has little or no effect in law. This written agreement is presumed by the
law to have been entered into by willing parties in possession of the necessary facts and
knowledge to make sound business decisions. The law presumes this even if you did not have
the facts or knowledge and even if you made a bad decision.
Statements made by the sales
person and information communicated to you in sales and promotional literature are negated
and superceded by this franchise agreement. If the sales person looks you
straight in the eye and tells you something is white when the agreement says it is black,
the law and the courts will consider it black. Thats simply the way it is.
Can I sue the franchiser if I am unhappy with the way my franchise goes?
You can sue anybody at any time you wish. All you need is
money, time, facts that are on your side, a franchise agreement that supports your case,
and a willingness to deal with the uncertainties of litigation.
Who should I contact to learn about a particular franchise?
Talk to everybody who knows something about that franchise.
This includes present franchise owners, past owners, the franchise company
representatives, professional advisors such as CPA
s and lawyers, Small Business Development Centers
volunteers, suppliers and manufacturers who supply that franchise, employees who work or
have worked in that franchise, and anybody else you think might have information.
Can an SBDC help me with a franchise?
Small Business Development Centers
can help you in many ways. It can help you organize
your research effort. It can help you find answers to some of your questions. The SBDC
Research Network in New York can help dig out facts for you. Required financing can be
prepared for with the use of SBDC
s and the SBA
loan guarantee programs. Bank and SBA
financing sometimes favors franchise businesses.
Will a franchise give me marketing strength and significant support?
Even though most franchises will tell you "yes,"
the preponderance of numbers says "no."
Of all the thousands of franchises being offered for sale
in this country, only a small percentage will give you
marketing strength and significant support. These are the big ones we all
know about and see every day as we drive down the street.
that we do not see or know about, except in an advertisement seeking to sell the
franchise, do not give marketing strength or significant
support. They may claim to or they may hope to someday, but now do not.
Will a franchise give me a proven business system?
If you mean by "proven business system" a system
that has been tested and proven in the market many times over and has shown the capability
to produce profits more often than not the answer is
. The large, well-known franchises do provide this. They have
proven business systems.
For the others, they range
from partially proven to not-at-all proven. For new franchise offerings,
the business system has only just been put together, to say nothing of tested or proven.
Often, you may be part of the test if you join the
What is the most common complaint of franchisees?
Lack of support from the
. Sometimes this complaint of poor support is because the
training to run the franchise is not what the franchisee thought it would be. Other times
it is because in times of difficulty, the franchiser is not there to help solve problems.
Can I get financing from the franchiser to help me start?
Seldom do franchise companies offer this. They are looking to you to provide this money.
If you need help, they expect you to borrow it or raise it
on your own.
Sometimes a franchiser will provide some financial help by
way of short-term credit on inventory purposes or partial deferral in the payment of
franchise or royalty fees.
One of the reasons they want you is
that you provide an additional source of capital for them. They are not there
to provide capital for you.
Do I have a better chance of success with a franchise?
There is a division of opinion about this. Most of what you
read and all franchise companies will suggest that the answer is definitely yes. Even the
U.S. government, the Small Business Administration, and the U.S. Commerce Department will
However, some research questions this belief. This
research questions the validity of statistics that support a yes answer.
Some of these statistics come from the franchise industry itself and use reporting
practices that distort results. At least one study has shown the opposite to be true:
non-franchised businesses showed a higher success rate than like-kind franchise
The reason many would argue for a yes answer is that when
we think of a franchise, we think of the large, well established franchises. We do not
think of the many small, startup franchises with no real market position or business
method. If you were to focus on these, which comprise the great majority of franchises, it
is easier to understand why there are many franchise failures.
One study of a few years ago compared the franchise
companies listed by Entrepreneur Magazine
at two periods of time five years apart. This study showed
that 70 percent of the franchise companies listed in the earlier report were not shown in
the latter report five years later. Where did they go? Where did all the
franchise units go that were sold by this 70%?
Will I need more or less capital to start a franchise than to start a non-franchise business?
Not a great deal is known about this, but some studies have shown that it costs more for the franchise.
This sounds reasonable since in addition to paying for the usual startup costs of a
business, the franchisee must also pay a franchise fee and other costs associated with
evaluating and purchasing the franchise.
If a franchise will cost more to start, can I expect to earn more?
With some, yes, but with others, no. The large established
franchise businesses will probably offer you better earnings than you could realize on
your own without the franchise. On the other hand, one study
of 7,270 businesses showed the non-franchise businesses earning much more than the
In order to earn more with a franchise, the
higher costs of belonging to the franchise group must be more than offset
by the market or operating advantages offered by the franchise association.
Are there any good Internet sites on franchising?
Yes, try Franchise Times
, a franchise publication that deals with the interests of franchisees and potential franchisees.
It has many good features including the 200 top-rated franchises. You can also try
Be the Boss
, a great site for people interested in
For more information on Franchising, contact your local
Small Business Development Center.
Copyright © 2010 North Texas Small Business Development Center