Franchises

Increasingly, large numbers of people who want to own their own business or who have become unemployed either through early retirement or corporate downsizing are looking for a way to master the complexities of running a business without having to invent every procedure on their own. The answer for these people often is franchising. Long thought of only as the way to run a fast food restaurant, franchising has branched into nearly every industry in one form or another.

Whether by necessity or by plan, everyone at some time considers being their own boss. Growing numbers of adults age 50 and older want to start their own business. Years of business and life experiences work in their favor, but many do not have the stamina or the desire to put in the long hours required to get a start-up off the ground. Others fear risking their nest egg on a venture that may pan out. Unlike 20 or 30-year-olds, someone 50 or older doesn't have time to recover from a significant setback.

Although starting any business is risky, one way to bridge the gap between employment and starting a business from scratch is purchasing a franchise. Although there are still significant time and capital commitments, historically, a larger share of franchises succeeds than independent businesses. Plus, the strict formula that franchisers provide to owners is usually a well thought out plan for running a business that can take a year or more to develop independently.

What is a Franchise?

A franchise is a way to operate a business that spreads the investment among the individual owners, while maintaining control over the products sold, business processes, advertising, marketing and intellectual property, for the benefit of the franchisor and the owners. Legally, a franchise has three elements. Without any of these three, a business is not a franchise. The three elements are:

1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services at retail under a marketing plan or system prescribed in substantial part by a franchisor;



2. The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and



3. The franchisee is required to pay, directly or indirectly, a franchise fee of $500 or more.

The most valuable asset the franchisor has to sell is almost always an intangible asset. It can be a brand, a process, a formula or a recipe, or a combination of these. Whatever this valuable asset is, the franchisor has worked hard to develop it and is trying to capitalize on his success. He does this by getting investors to buy a franchise, the right to use his asset for a fee, called the franchise fee. Additionally, most franchises require franchisees to pay an ongoing fee called a royalty. Generally, the royalty is determined as a percentage of the franchisee's sales or gross revenues.

One thing that a potential franchisee should not overlook is the business systems that the franchisor has developed for running the franchise. These may include supplier agreements that reduce the costs of inventory for franchisees, well-detailed operations manual that makes it easy to operate and run the franchise or proprietary software that is used to manage the business.

Buying a Franchise

Franchises are bought and sold every day. Shopping for a franchise is a serious undertaking. There are many things a potential franchisee needs to investigate to make a decision to buy. Fortunately, the law provides some protection to persons looking to buy a franchise. The most important document you need to see when considering the purchase of a franchise is the Uniform Franchise Offering Circular or "UFOC". The UFOC contains the franchise agreement that you would be required to follow. It also contains a lot of valuable information about the franchisor, including financial information about the franchisor, how many other franchises there are, how many have opened each year and how many have closed. This information can tell you a lot about the strength of the franchise and whether it operates well. You will also get an idea of the cost to buy and operate a franchise, although these numbers are typically expressed as a range, with a lot of room between the high and low numbers. This is understandable if the franchise is national, due to variations in rents, labor and transportation costs among different regions.

One of the best sources of information about a franchise system is the existing franchisees and even franchisees who have left the franchise system. These people can tell you how well the system works, how well the franchisor supports the franchisees in the system and what kinds of problems have developed in the system that drove the existing franchisees to leave. One thing to be careful of is a franchisor who says that a potential franchisee must speak to designated franchisees in the system and tries to keep the potential franchisee from talking to other franchisees. This is one of the biggest red flags you can encounter in investigating a franchise. All franchisees existing in the system as of the date of the UFOC are listed and anyone of them can be contacted. You should plan to speak to at least four from areas that are close to the franchisor headquarters as well as far away, in heavily populated areas and rural areas, to gather a sense of the difference various factors have on the success of the franchises around the country.

The best advice for someone who has begun discussions with a franchisor is to use the services of an experienced franchise attorney to review the UFOC. The attorney will have read a number of UFOCs and will be able to point out potential strengths and weaknesses of that particular franchise. He may have even worked with this franchisor before, or is familiar with competitors within that particular industry.