Bone tired after driving six hours with kids fussing in the back seat, you pull off the highway to grab some dinner. On one side of the road is McDonalds. On the other side is Jimmy’s Drive-In. Which one are you pulling into?
“I make the joke that McDonalds has one of the worst hamburgers I have ever had…yet I eat there,” says Stuart Levenberg of The Kensington Company, a business brokerage firm based in Roslyn Heights, N.Y. “I know the brand, they know how to move the line, I know what to expect.”
That is the draw of owning a franchise as a small business versus going it alone. You can be your own boss — to a degree — while taking advantage of instant name recognition, established procedures, training and support.
“The most obvious pro to purchasing a franchise is buying into an established business model,” says Allison O'Kelly is founder/CEO of Mom Corps, a nationally franchised flexible staffing firm. “We like to call franchise owners seat belt entrepreneurs. They want to be a business owner, but aren't comfortable taking the risk and starting out fresh.”
But buying a franchise is no guarantee of success, experts say.
“When you buy a franchise, you are buying the right to use the franchisor’s operating system,” says Rick Bisio, author of “The Educated Franchisee.”
Your research should focus on if the franchisor’s system reduces business risk, Bisio says.
“If the answer is ‘no,’ then you need to pass on the opportunity — regardless of how excited you may be,” Bisio says.
Buying a franchise demands upfront money — just like starting a mom-and-pop business. The costs include a franchise fee, which will range from several thousand dollars to several hundred thousand dollars. Before opening your doors, you’ll also have to spend money to rent space, build out and equip the business. You may also have to buy initial inventory.
Once things are up and going, you will likely have to pay royalties based on a percentage of your gross income.
The franchisor also will maintain some controls on how you run your business. If you own a restaurant franchise, for example, you won’t be able to make any changes to your menu.
All the costs and controls are detailed in the franchisor’s disclosure document. Federal Trade Commission regulations require that would-be buyers receive the document at least 14 days before asked to sign any contract or pay any money to the franchisor. There may be additional state regulations.
“One of the biggest mistakes people make is not reading the franchisor’s disclosure document,” says Daniel S. Krakower, an attorney with the law firm Shulman Rogers in Washington, D.C.
Reading — and understanding — the disclosure document is critical, Krakower says. The documents can be lengthy, but FTC and state rules require they be in plain English. Still, it’s a good idea of have an attorney review the disclosure before you commit, Krakower says.
The consumer guide published by the Federal Trade Commission highlights some of the key information you should look for in the franchisor’s disclosure document, including business history, experience of executives, has the company been sued, royalty payments, advertising payments, restrictions on suppliers, training and how the contract may be terminated.