Franchising FAQ

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 the franchiser. If possible, contact past franchisees 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.

Compare the 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 supersedes 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 rules.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 drafting UFOCs and lawyers sometimes have a way of phrasing things in a way that makes them difficult to understand by the non-lawyer.

For this reason, it is a good idea to get legal help in understanding and interpreting UFOCs if you don’t 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 franchise, you might as well establish that relationship before you sign up.

Are all franchises pretty much alike?

No. 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 fairly valued and some are rip-offs. Some will rush to your aid if you have problems, but many will dump you.

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. They 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.Inexpensive franchises 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, un-established franchises.

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 the Uniform 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 didn’t, 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 they make.

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:

  1. 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.
  2. They do not want you to talk with existing franchisees.
  3. They will not give you much information about their franchise.
  4. They require money from you before they will give you information.
  5. They will not give you general sales and earnings histories of their franchisees.
  6. There seems to be no established market demand for the product or service offered by the franchise.
  7. 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 their direction.

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.

How do I know which franchise is best for me?

Start by writing down what you want 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. Don’t get carried away with enthusiasm. Don’t 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 no. 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. Read them 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 provide me with earnings estimates?

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 this.

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:

  1. Most franchise agreements require you to sue in the home state of the franchiser.
  2. Some agreements require you to pay all attorneys fees – yours and theirs.
  3. The franchise agreement is usually slanted in favor of the franchiser. Think of whose lawyers drafted the agreement in the first place.
  4. Case law in franchise matters does not favor the franchisee.
  5. 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.
  6. The franchisers usually have more money for legal fees than do you.
  7. The lawyers for the franchiser are accustomed to these disputes. Your lawyer may have limited or no experience in franchise law.

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 superseded 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. That’s 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.

Can an SBDC help me with a franchise?

Yes. A 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 SBDCs 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.

The thousands 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 often NO. 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 franchise.

What is the most common complaint of franchisees?

Lack of support from the franchiser. 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?

Usually not. 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 say yes.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 businesses.

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 capital to start a franchise than 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 franchised businesses.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 Franchise Expo, a great site for people interested in franchise possibilities.