Purchasing a Franchise

Franchising offers a unique opportunity for individuals interested in operating a business. It allows you to both own and operate a business while drawing from the resources of the parent company. This arrangement may reduce some of the risks of going into business for yourself, depending upon the quality and stability of the franchiser. While fewer than five percent of all franchised businesses fail annually, success is not guaranteed. You should not rush into franchising before completing a thorough investigation. It should be noted that while a franchise is a method for going into business, it is NOT a form of legal structure. The franchiser — the business with the plan and structure — and the franchisee — you — are two completely separate businesses. You must each determine the appropriate form of legal structure for your own business. Refer to the Legal Structure and Registration chapter of this guide for more information.

Franchise Service

The franchiser often provides a range of services to assist you, the franchisee, in starting and operating the business. Types of assistance vary depending upon the company. It is important that you fully understand and have documentation in writing regarding which services your franchiser will and will not provide. Types of services available may include:

Use of the company trademark, trade name, service mark or any other company identification
Site selection for your business
Training programs
Marketing and advertising ideas
Equipment and inventory purchasing assistance
Capital/financial assistance

Selecting A Franchise

Once you have decided that you are able to meet the requirements for purchasing a franchise, you may want to shop around for the best investment. There are various publications and franchise directories available from bookstores and public libraries. The classified sections of your local newspaper or magazine often have listings of franchise offers. Franchise fairs and conventions are another method for learning about different franchise opportunities.

Exercise Caution

Before you agree to invest in a company that promises you large financial returns, you should exercise some caution. Colorado lacks specific laws to protect you should you need recourse. However, there are general provisions governing “good business practices.” These protections against deceptive and unfair trade practices are stated in the Colorado Consumer Protection Act and the Uniform Consumer Credit Code. The federal government also offers protection from problems encountered by non-disclosure and misrepresentation. The Federal Trade Commission’s Franchise Rule requires franchisers to provide prospective buyers with a detailed disclosure statement regarding the company’s history, background and operations. This document should also describe the costs and responsibilities of both the franchiser and the franchisee and must be made available to you at least ten days before any agreements are signed, or at the first face-to-face meeting, whichever comes first.

Before You Buy

Always ask for a disclosure statement. The Federal Trade Commission has information for franchisers and franchisees on federal disclosure requirements.
Compare similar franchise benefits and costs.
Contact current franchisees for additional information and compare their business experiences with the information provided to you by the franchisor. The franchiser should make the names of her/his other franchisees available to you.
Investigate the franchiser’s earnings claim and determine if it is legitimate.
Obtain a WRITTEN CONTRACT specifying the exact terms of the franchise agreement and any promises the franchiser makes to you.
Make sure you thoroughly understand the company’s operating policies.
Consider consulting a professional, independent (not one recommended by the franchiser) attorney, CPA or business advisor who is familiar with franchise laws to examine the terms of the franchise offer before you sign to help you secure the best deal. Your advisor should review the franchise contract itself, any property/ equipment purchase agreements and any property/equipment leasing agreements.

Ask The Right Questions

Obtaining reliable information before you invest in the business will help you make an informed decision. The success of the franchise depends upon a number of factors.

Most importantly, you should consider:

What are the total costs of the franchise? These may include opening costs for inventory and fixtures, franchise fees, licensing fees, working capital, on-site expenses for the lease and construction and any service charges.
Is it affordable? Are there any hidden costs that might not be spelled out in the franchise agreement?
Does the business require any special skills? What types of training programs are available? At what cost? For how long?
What type of assistance will you receive from the franchisor? At what cost? For how long? What types of ongoing fees or royalties are involved?
If there are changes in the program or method of doing business, will you have any input into the process? Will changes be dictated by the franchisor’s home office?
Are there restrictions on renewing, transferring, selling or terminating the business? Does the franchisor have the right of first refusal when renewing your contract?
What type of control will the franchisor exercise over the operation of your business?
What are the costs of purchasing the necessary equipment? Are competitive rates available? What type of warranty and maintenance services are available? If the equipment becomes outdated, what must you do to update it?
What financial investment is required of you? Does the franchisor offer credit arrangements?
How will you finance the business? What are your current assets? What type of loans will you be eligible for?
Can you terminate the franchise agreement? If so, at what cost?

Additional Sources of Reference

“Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (The Franchise Rule) and “The Consumer Guide to Buying a Franchise” are available free from the Federal Trade Commission.

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