Should I Buy a Franchise? Advice and Government Resources…

As with any new business venture, purchasing a franchise has potential risks. How do you know if buying a franchise is right for you?  Here are a few tips and free government resources that can help you along the way in making a decision that suits your needs.

Buyer Beware

Everyone isn’t as honest as Mom. Recognizing and avoiding scams is key - do your research! The most common scam is known as the “pyramid scheme” or a multilevel marketing plan. This involves illegal practices where you are promised commissions for the amount of people that you recruit, not the amount of goods you sell as a distributor. Typically, only a very limited amount of people (those at the top of the pyramid) actually receive any money. Most states have outlawed pyramid schemes. The FCC provides a great resource on pyramid schemes and consumer alerts.

Franchise Benefits and Risks

Once you’ve assessed the opportunity clearly and eliminated the shysters out there, realize that that a great benefit about buying a franchise is instant name and brand recognition. People automatically know what to expect and have established loyalty in the business right away. There is established marketing and advertising, too - although with a price tag in most cases (paying a portion of your local advertising or promotions).

There are also varying fees associated with branded franchises. In exchange for the right to use a franchisor’s name for a set period of time, you will inevitably incur an initial franchise fee. The range for this fee can be hefty and usually includes: inventory, rent and equipment costs, operating licenses, and “grand opening” or promotion fee. Before you sign on the dotted line, make sure that you have the funds for the initial investment. In addition to this startup investment, most franchisors require frequent royalty payments, usually monthly. These royalty fees are usually a percentage of weekly or monthly income. Check out more information on the possible costs of starting a franchisee.

Tips for Selecting a Franchise

Now that you have information on avoiding scams and you’ve determined that you have the proper funds to invest, the next step is picking a franchise. Before you jump on an opportunity, you should always evaluate alternatives and ask yourself these two questions:

• Is there a demand for certain products or services in your area?
• What is the level of local competition?

Pick a franchise that is right for who you are: consider your schedule, goals, family, etc. Perhaps the most important step in selecting a franchise is to evaluate each one’s Disclosure Document. This document contains the company background, initial and ongoing franchisee costs, restrictions, training guidelines, advertising information, current and former franchisees in your area, earnings information, and other important information. However, even armed with this information and feeling confident, you should always visit (in person) at least three other franchisees. The reason that you should visit in person is to make sure that they are actually franchisees and not phony references (people that are paid to say certain things). Like with any other business venture, it pays to be careful and do your homework.

Other Resources

Franchise and Business Opportunity Guide

Tracy Johnson is a Senior Manager with ENC Marketing & Communications. She has the pleasure juggling a variety of clients from both the Information Technology and U.S. Government worlds. She brings a fresh perspective to problem solving for clients often integrating interactive marketing solutions with traditional communication methods. One of her top current clients is the Business Gateway Initiative, where she and the BG team provide marketing and outreach services for Business.gov.