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.
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:
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.
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.
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:
“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.