Purchasing a franchise is like any other investment: it comes with risk. When you consider a particular franchise, think about demand for the products or services it offers, whether competitors offer similar products or services, the level of support you will receive and the franchisor’s reputation.
Demand
Is there a demand for the franchisor’s products or services in your community? Is it seasonal or evergreen? Could you be dealing with a fad? Does the product or service generate repeat business? Is the franchisor’s name so well known that it will bring in customers, or will you have to create a market for the franchise?
Competition
What’s the level of competition — nationally, regionally and locally? How many franchised and company-owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies, including competing franchises, sell similar products or services at a similar price? Are those companies well established or widely recognized in your community?
Your Ability to Operate the Business
Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you need the franchisor’s ongoing training, advertising or other help to remain in business? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off?
Name Recognition
Buying a franchise gives you the right to associate with the franchisor’s name or brand. An established franchise with a well-known name — and good reputation — is more likely to draw customers than a relatively new or unknown franchise. If you invest in a franchise, you’ll be responsible for creating customer demand for its goods or services in your area.
Consider:
- how long the franchisor has been in business
- name and brand recognition for the franchisor and its products or services
- whether the franchisor has a reputation for quality products or services
You’ll want to find out from the required disclosure document whether the franchisor has a federally registered trademark. If it doesn’t, a company using the same mark in your area could force you to change the name or mark of your outlet at your expense.
Complaints About the Franchise
It’s also a good idea to check whether consumers or franchisees have filed complaints against the franchise or franchisor with franchise regulators, Better Business Bureaus (BBBs) or local consumer protection agencies in your state or the franchisor’s home state. Read more about how to check out a franchise in “Additional Sources of Information” at the end of this Guide.
Training and Support Services
What training and continuing support does the franchisor provide? Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field? Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience or training similar? What do current franchise owners say about the quality and usefulness of the training they received?
Franchisor’s Experience
Many franchisors that operate well-established companies have years of experience selling goods or services and managing a franchise system. Some franchisors started by operating their own business. There’s no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. Find out how long the franchisor has managed a franchise system. Does the franchisor have enough expertise to make you feel comfortable? If the franchisor has little experience managing a chain of franchises, take promises about guidance, training and other support with the proverbial grain of salt.
Growth
A growing franchise system increases the franchisor’s name and brand recognition and may enable you to attract customers. But growth alone doesn’t ensure that franchisees will be successful. In fact, a franchisor that grows too quickly may not be able to support its franchisees with the services it promises them. Investigate the franchisor’s financial assets and resources. Are they sufficient to support you and all the other new outlets the franchisor plans to open?
Source: Federal Trade Commission
