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Franchises: How to choose one and why some fail

06th January 2011
By aaronklaw in Business Law
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How to choose a franchise
Franchises: How to choose one and why some fail

Franchising is a popular way to start your own company, which is why it is not a business decision that should be taken lightly. When choosing a franchise it is important to obtain good advice, take your time, and only make the decision when you are comfortable. Most franchises can be broken down into one of several categories:

- hotels and food - bars, fast-food, restaurants, frozen yogurt;

- retail - clothing, shoes, electronics, golfing equipment;

- personal services - hair and beauty, tanning salons, fitness clubs;

- property services - office maintenance, plumbing, carpet cleaning;

- automotive - dealerships, repair, gas;

- business services - accountants, printers, business supplies

Each of the above has its own distinct advantages and disadvantages. Some franchises have some flexibility in their ownership, while others have none. All of this will depend on what the franchise agreement says. The franchise agreement is a document that sets out the terms and conditions that will govern the ownership of the franchise - and is usually drafted by the franchisor. Before signing the agreement, you should pay close attention to what it entails, and even take it to an attorney who will be able to read it over for you and provide advice.

Also, it is important to have already asked the franchisor several questions to determine whether entering into the franchise agreement would be wise. Although the following list is not comprehensive it should be a start:

1) What is the initial franchise fee? Is any part of the fee refundable?

2) Does the franchise include an inventory of products and supplies? Who pays for that?

3) What are the payment terms? Is there any financing?

4) Who determines site location?

5) How are advertising and promotion costs divided?

6) Are accounting/bookkeeping services included or available?

7) Does the franchisor provide for training? If so how much?

8) Is a specified amount of working capital required of the franchisee to cover operating costs until profits can be made?

9) Must the premises be leased or purchased?

10) Will other franchisees be permitted to compete in the same area, now or later?

11) Who establishes hiring procedures?

12) Does the franchisor have absolute privilege of terminating the franchise agreement if conditions are not met?

13) Under what conditions can the franchisee terminate the franchise?

The above may seem like a hassle, but when your financial future is at stake it is important to ask questions like these. Again, these are not all of the questions and you should consult with an experienced franchise attorney to help guide you through purchasing the franchise.

Common reasons why franchises fail

Not all franchises are successful. Those that don't have normally overlooked some of the simple precautions that could have been taken before buying. One of the most crucial elements is whether the franchisor has opened up their accounting books to you. You should be able to track the monthly profits and losses of the franchise down to the last penny. Although not all franchisors will be so willing, it is important to investigate thoroughly.

In addition to the above, most franchisees fall short because they have done one of the following:

1) Trying to skimp on fees and not hire experienced advisors

2) Skipping over legal stuff

3) Taking the franchisor at his word

4) Not talking to existing franchisees

5) Not checking out failed franchises

6) Not staying grounded, and failing to develop a business plan

7) Not doing market reserach

Protecting your investment

Above all, never forget that franchising is a business...and a risky one at that. Many franchisees have been victimized by fraudulent franchisors and marketing ploys. From unfulfilled promises of support, to not completely divulging the financials of the franchise, there are pitfalls everywhere. Therefore, it is important to have experienced advisors on your side, ask the right questions, and take your time when choosing the right franchise for you.
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