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Franchising information for [potential] franchisees

Franchising is a long term relationship. It requires significant commitment of capital and personal time, and does not guaranty success. You should:

Franchising is often viewed as a way to start a business with decreased risk of failure, and reduced time to become operational and then profitable. This is particularly likely to be the case if you lack sufficient business experience to strike out on your own. While studies support that franchisee businesses have lower failure rates than non-franchise start-up businesses, that does not guaranty success for all franchise systems or the individual new franchisee.

Franchising likely will NOT achieve you being the owner of your own business

Is the opportunity a good match for your "style" and personality ?

Due diligence investigation

Your investigation before purchasing a franchise should include contacting current and former franchisees (listed in the required disclosure document) regarding their experiences and satisfaction with the franchise. But, be cautious in accepting what they tell you. People are often are reluctant to admit they made a mistake in purchasing the franchise or to tell you they are not a success. Current franchisees may not be forthcoming with you for fear of repercussions from a franchisor with whom they must continue to deal. Former franchisees may have agreed not to "disparage" franchisor or want to put the experience behind them. Pay particular attention to lawsuits between current or former franchisees and franchisor (listed in the required disclosure document). Are there numerous suits ? What do they involve ?

You should determine that the franchise offers sufficient income opportunity at a level satisfactory to you. This may be difficult. Regulatory restrictions on franchisors' ability to make "earning claims" often results in franchisors not providing any financial information on franchisee operations. Inconsistent franchisee accounting practices make review of financial information obtained directly from franchisees difficult. Again, franchisees may be motivated to distort financial information, e.g., by pride and wanting to appear more successful, or understating income, and or overstating expenses, to avoid tax, royalties, etc.

Franchising is a long term relationship

It needs to be beneficial to both parties. Franchisors earn income through royalties from ongoing franchisee operations, and so depend on franchisees being profitable and continuing in operation. Initial franchise fees may be largely consumed by costs of the sale and training and assisting the new franchisee to become operational. A franchisor's dependence on franchise sales rather than royalties for income is reason for caution. A significant number of franchisees failures or lawsuits between franchisees and franchisors (disclosed in the franchise offering circular) are also counter-indicators that a quality long term relationship exists.

Does the franchisor provide continuing value for ongoing royalties

You may be happy early in the relationship, feeling the initial fee was worth the head start franchising provided. But, royalties continue through the franchise relationship and are paid to franchisor "off the top" whether or not franchisee makes a profit. Franchisees often become discontent after several years as they continue to pay royalties and feel franchisor does not continue to provide value in exchange. What will franchisor do years after you are up and running to "earn" the royalties you will be paying ?