There are many ways other than franchisors’ websites to find information about franchise opportunities, including visiting local franchised outlets, looking at franchise handbooks, attending franchise expositions and working with franchise brokers.
Local Outlets
It’s always a good idea to visit franchised outlets in your area and talk to the owners about their experience with particular franchisors.
Franchise Handbook
A “franchise opportunities handbook,” available from a library or online, will list available franchises by type of business and provide basic information about each franchise. You can use a handbook to find a franchise if you don’t know the type of business you want, or to see which franchises are available for the type of business that interests you.
Franchise Exposition
Attending a franchise exposition allows you to see and compare a variety of franchise possibilities at one time. Before you attend, research the kind of franchise that may best suit your budget, experience and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you. Ask questions, including:
- How many franchised outlets are there? Where are they?
- What is the initial franchise fee? What are the additional start-up costs?
- Are there continuing royalty payments? How much are they?
- What management, technical and other support does the franchisor offer?
- What controls does the franchisor impose?
- How long has the franchisor been in business?
Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in detail. These meetings can be another source of information and give you a chance to raise questions, but they may also expose you to high-pressure sales tactics. Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs.
Franchise Broker
Franchise brokers may call themselves “business coaches,” “advisors,” “referral sources” or “sales consultants.” They often advertise on the internet and in business magazines, offering to help you select among various franchise options. Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources. A broker also may help you finish applications and the paperwork to complete the sale. Brokers often work for franchisors, and are paid only if a sale is made.
Before you decide to use a broker, consider whether you need a broker’s services or could get enough information by shopping online or reading trade magazines.
What choices does the broker offer?
Some franchise brokers may claim to be able to match you with “the perfect opportunity” because they represent a wide range of business sellers. That may be true — or not.
Ask how many franchisors the broker represents. A broker who represents only a few franchisors will give you limited suggestions.
How does the broker select franchises?
Some franchise brokers may claim they will suggest only those franchises that meet certain standards. You may think this means that your risk is limited because the broker weeds out poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. A broker who does that might direct you to a franchisor that is failing or doesn’t have a strong history.
Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned down.
How is the broker paid?
Some brokers earn a flat fee regardless of the price of the franchise they sell. Others earn a commission based on the cost of the franchise. These brokers may steer you toward a more costly franchise to increase their commission.
Ask who pays the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission.
Are the broker’s earnings claims reliable?
To convince you to buy a particular franchise, a broker may talk about how much money you can make. These claims may not be true or can be misleading. For example, the figures may be based on earnings in an area where there is high demand for the franchisor’s goods or services. Or the claim may be based on outdated industry data. In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far less. Because earnings representations may be misleading, franchisors usually don’t allow their sales representatives to make claims about sales, income or profits unless the claims are included in the franchise disclosures the franchisor must give you.
The required franchise disclosures will list the names and contact information for the franchisor’s current and former franchisees. Talk to them, rather than relying on information from the broker alone. Ask about their experience with the franchisor.
Source: Federal Trade Commission
