A Consumer
Guide to
Buying a Franchise

---

---

Contents
Introduction ........................................................................... 1
The Benefits and Responsibilities of Franchise Ownership..... 2
The Cost .......................................................................................... 2
Controls .......................................................................................... 3
Terminations and Renewal ................................................................ 4
Before Selecting a Franchise System...................................... 5
Your Investment ................................................................................ 5
Your Abilities .................................................................................... 5
Your Goals ....................................................................................... 5
Demand .......................................................................................... 6
Competition ..................................................................................... 6
Your Ability To Operate Business ....................................................... 6
Selecting A Franchise ............................................................ 6
Name Recognition ............................................................................ 7
Training and Support Services ........................................................... 7
Franchisor?s Experience .................................................................... 7
Growth ............................................................................................ 8
Shopping at a Franchise Exposition....................................... 9
Know How Much You Can Invest ....................................................... 9
Know What Type of Business Is Right For You ..................................... 9
Comparison Shop .......................................................................... 10
Get Substantiation For Any Earnings Representations........................ 10
Take Notes ..................................................................................... 10
Avoid High Pressure Sales Tactics .................................................... 11
Study The Franchisor?s Offering ...................................................... 11
Business Background...................................................................... 12
Litigation History ............................................................................ 12
Backruptcy ..................................................................................... 12
Investigating Franchise Offerings ........................................ 12
Costs ............................................................................................. 13
Restrictions ..................................................................................... 14
Terminations .................................................................................. 14
Training and Other Assistance......................................................... 14
Advertising ..................................................................................... 15
Current and Former Franchisees ..................................................... 16
Earnings Potential ........................................................................... 17
Financial History ............................................................................ 18
Additional Sources of Information ............... Inside Back Cover

---

---

Introduction
Many people dream of being an entrepreneur. By purchasing a franchise, you
often can sell goods and services that have instant name recognition and can
obtain training and ongoing support to help you succeed. But be cautious. Like
any investment, purchasing a franchise is not a guarantee of success.
To help you evaluate whether owning a franchise is right for you, the Federal
Trade Commission has prepared this booklet. It will help you understand your
obligations as a franchise owner, how to shop for franchise opportunities, and
how to ask the right questions before you invest.
1

---

The Benefits and Responsibilities
of Franchise Ownership
A franchise typically enables you, the investor or ?franchisee,? to operate a
business. By paying a franchise fee, which may cost several thousand dollars,
you are given a format or system developed by the company (?franchisor?), the
right to use the franchisor?s name for a limited time, and assistance. For ex-
ample, the franchisor may help you find a location for your outlet; provide initial
training and an operating manual; and advise you on management, marketing, or
personnel. Some franchisors offer ongoing support such as monthly newsletters,
a toll free 800 telephone number for technical assistance, and periodic workshops
or seminars.
While buying a franchise may reduce your investment risk by enabling you to
associate with an established company, it can be costly. You also may be re-
quired to relinquish significant control over your business, while taking on
contractual obligations with the franchisor.
Below is an outline of several components of a typical franchise system. Con-
sider each carefully.
The Cost
In exchange for obtaining the right to use the franchisor?s name and its assis-
tance, you may pay some or all of the following fees.
Initial Franchise Fee and Other Expenses
Your initial franchise fee, which may be non-refundable, may cost several
thousand to several hundred thousand dollars. You may also incur significant
costs to rent, build, and equip an outlet and to purchase initial inventory. Other
costs include operating licenses and insurance. You also may be required to pay
a ?grand opening? fee to the franchisor to promote your new outlet.
Continuing Royalty Payments
You may have to pay the franchisor royalties based on a percentage of your
weekly or monthly gross income. You often must pay royalties even if your
outlet has not earned significant income during that time. In addition, royalties
usually are paid for the right to use the franchisor?s name. So even if the
franchisor fails to provide promised support services, you still may have to pay
royalties for the duration of your franchise agreement.
Advertising Fees
You may have to pay into an advertising fund. Some portion of the advertising
fees may go for national advertising or to attract new franchise owners, but not
to target your particular outlet.
2

---

Controls
To ensure uniformity, franchisors typically control how franchisees conduct
business. These controls may significantly restrict your ability to exercise your
own business judgment. The following are typical examples of such controls.
Site Approval
Many franchisors pre-approve sites for outlets. This may increase the likelihood
that your outlet will attract customers. The franchisor, however, may not ap-
prove the site you want.
Design or Appearance Standards
Franchisors may impose design or appearance standards to ensure customers
receive the same quality of goods and services in each outlet. Some franchisors
require periodic renovations or seasonal design changes. Complying with these
standards may increase your costs.
Restrictions on Goods and Services Offered For Sale
Franchisors may restrict the goods and services offered for sale. For example, as
a restaurant franchise owner, you may not be able to add to your menu popular
items or delete items that are unpopular. Similarly, as an automobile transmission
repair franchise owner, you might not be able to perform other types of automo-
tive work, such as brake or electrical system repairs.
Restrictions on Method of Operation
Franchisors may require you to operate in a particular manner. The franchisor
might require you to operate during certain hours, use only pre-approved signs,
employee uniforms, and advertisements, or abide by certain accounting or
bookkeeping procedures. These restrictions may impede you from operating
your outlet as you deem best. The franchisor also may require you to purchase
supplies only from an approved supplier, even if you can buy similar goods
elsewhere at a lower cost.
Restrictions of Sales Area
Franchisors may limit your business to a specific territory. While these territorial
restrictions may ensure that other franchisees will not compete with you for the
same customers, they could impede your ability to open additional outlets or
move to a more profitable location.
3

---

Terminations and Renewal
You can lose the right to your franchise if you breach the franchise contract. In
addition, the franchise contract is for a limited time; there is no guarantee that
you will be able to renew it.
Franchise Terminations
A franchisor can end your franchise agreement if, for example, you fail to pay
royalties or abide by performance standards and sales restrictions. If your fran-
chise is terminated, you may lose your investment.
Renewals
Franchise agreements typically run for 15 to 20 years. After that time, the
franchisor may decline to renew your contract. Also be aware that renewals
need not provide the original terms and conditions. The franchisor may raise the
royalty payments, or impose new design standards and sales restrictions. Your
previous territory may be reduced, possibly resulting in more competition from
company-owned outlets or other franchisees.
4

---

Before Selecting a Franchise System
Before investing in a particular franchise system, carefully consider how much
money you have to invest, your abilities, and your goals. The following checklist
may help you make your decision.
Your Investment
w How much money do you have to invest?
w How much money can you afford to lose?
w Will you purchase the franchise by yourself or with partners?
w Will you need financing and, if so, where can you obtain it?
w Do you have a favorable credit rating?
w Do you have savings or additional income to live on while starting your
franchise?
Your Abilities
w Does the franchise require technical experience or relevant education,
such as auto repair, home and office decorating, or tax preparation?
w What skills do you have? Do you have computer, bookkeeping, or other
technical skills?
w What specialized knowledge or talents can you bring to a business?
w Have you ever owned or managed a business?
Your Goals
w What are your goals?
w Do you require a specific level of annual income?
w Are you interested in pursuing a particular field?
w Are you interested in retail sales or performing a service?
w How many hours are you willing to work?
w Do you want to operate the business yourself or hire a manager?
w Will franchise ownership be your primary source of income or will it
supplement your current income?
w Would you be happy operating the business for the next 20 years?
w Would you like to own several outlets or only one?
5

---

Selecting A Franchise
Like any other investment, purchasing a franchise is a risk. When selecting a
franchise, carefully consider a number of factors, such as the demand for the
products or services, likely competition, the franchisor?s background, and the
level of support you will receive.
Demand
Is there a demand for the franchisor?s products or services in your community?
Is the demand seasonal? For example, lawn and garden care or swimming pool
maintenance may be profitable only in the spring or summer. Is there likely to be
a continuing demand for the products or services in the future? Is the demand
likely to be temporary, such as selling a fad food item? Does the product or
service generate repeat business?
Competition
What is the level of competition, nationally and in your community? How many
franchised and company-owned outlets does the franchisor have in your area?
How many competing companies sell the same or similar products or services?
Are these competing companies well established, with wide name recognition in
your community? Do they offer the same goods and services at the same or
lower price?
Your Ability To Operate Business
Sometimes, franchise systems fail. Will you be able to operate your outlet even if
the franchisor goes out of business? Will you need the franchisor?s ongoing
training, advertising, or other assistance to succeed? Will you have access to the
same or other suppliers? Could you conduct the business alone if you must lay
off personnel to cut costs?
6

---

Document Outline

• Contents
  • Introduction
  • The Benefits and Responsibilities
  • of Franchise Ownership
  • The Cost
  • Controls
  • Terminations and Renewal
  • Before Selecting a Franchise System
  • Your Investment
  • Your Abilities
  • Your Goals
  • Demand
  • Competition
  • Your Ability To Operate Business
  • Selecting A Franchise
  • Name Recognition
  • Training and Support Services
  • Franchisor's Experience
  • Growth
  • Shopping at a Franchise Exposition
  • Know How Much You Can Invest
  • Know What Type of Business Is Right For You
  • Comparison Shop
  • Get Substantiation For Any Earnings Representations
  • Take Notes
  • Avoid High Pressure Sales Tactics
  • Study The Franchisor's Offering
  • Business Background
  • Litigation History
  • Backruptcy
  • Investigating Franchise Offerings
  • Costs
  • Restrictions
  • Terminations
  • Training and Other Assistance
  • Advertising
  • Current and Former Franchisees
  • Earnings Potential
  • Financial History
  • Additional Sources of Information Inside

---