Purchasing a Franchise

Dear M & M:

I am considering purchasing a franchise are there any pitfalls I should look out for?

-Jackie

Dear Jackie:

There are over 3,000 franchise opportunities out there today. It is important to know many things about any business before you jump into it whether it is a franchise or not. Many franchises advertise they have all they systems in place, they can teach anyone how to make a donut. One of the main questions a lender will want to know is, “Do you have any experience running this type of business?” One needs to have some experience and know a little about the industry. There are exceptions to every rule and there are examples of individuals succeeding with no experience learning as they go. Managerial competencies and market conditions can play significant roles in the success or failure of any business. Other important factors to take into considerations are finding a franchise that interests you and one that is a good investment.

Passion, enthusiasm, drive and perseverance are traits one needs to be successful in any business and it is a lot easier to be passionate and enthusiastic about something if you are truly interested in it. To the second point about finding a franchise that is a good investment, shop around make comparisons. Every franchise has different costs to get in business and each franchise comes with its own unique set of operating costs. Return on investment or potential rate of return needs to be considered.

Is the franchise you are looking at successful, how many do they have, where are they, what is their image, are they well known, and what does their future look like down the road? Keep in mind a franchise is governed by the terms in the franchise agreement. You will operate as an independent contractor with the ability to make a profit or sustain a loss based on market conditions and your managerial expertise. According to the International Franchise Association, “Franchises often have a revenue advantage over independent businesses — and sometimes it’s a very large advantage.

In the food and retail sectors, for example, franchises make up only 15% of businesses, but receive 40% of the revenues.” Franchises provide proven systems, training and support but there are no guarantees in any business venture. An article written by Victoria Duff titled, “What Is The Franchise Failure Rate vs. Sole Proprietorships?” published by Demand Media stated, “A study published in the Cornell Hotel and Restaurant Administration Quarterly titled “Why Restaurants Fail” found that, over a three year period from 1996 to 1999, chain restaurants consistently performed slightly better than independent restaurants, with 57.2 percent of the chain restaurants out of business by the third year as opposed to 61.4 percent of the independent restaurants. On the other hand, in 2002, the Small Business Administration published its findings on the performance of franchise loans, stating, “Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.” From 1991 to 2000, 7 percent of franchise loans defaulted versus 6.3 percent of non-franchise business loans.”  

Remember there are many pitfalls to running any type of business. One needs to understand the risks so steps can be taken to overcome them. Just because it is a franchise do not assume someone else has taken care of all the things that can go wrong. Homework needs to be done on the franchise, market conditions, competition, and your experience and passion for the product will all play equally important parts in the success or failure of your decision.

The Federal Trade Commission, the nation’s consumer protection agency, has prepared a booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest. Information can be obtained by going to their web site at: http://www.business.ftc.gov/documents/inv05-buying-franchise-consumer-guide. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357). Sources: www/franchise.org, www/sba.gov/franchise; Bureau of Consumer Protection Business Center, http://www.business.ftc.gov/documents/inv05-buying-franchise-consumer-guide.

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation (EDF) at 520-458-6948 or email  hollism@svedf.org .

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