A Consumer Guide to Buying a
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
The Benefits and Responsibilities of Franchise
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
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 example, 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 required to relinquish significant control over
your business, while taking on contractual obligations with the
Below is an outline of several components of a
typical franchise system. Consider each carefully.
- The Cost
- In exchange for obtaining the right to use
the franchisor's name and its assistance, you may pay some or all of the
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.
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.
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.
- 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.
approval. Many franchisors pre-approve sites for outlets. This may
increase the likelihood that your outlet will attract customers. The
franchisor, however, may not approve the site you want.
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.
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 automotive work, such as brake or
electrical system repairs.
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.
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.
- 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.
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 franchise is terminated, you may lose your investment.
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.
Before Selecting a Franchise
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
||How much money do you
have to invest?
||How much money can you
afford to lose?
||Will you purchase the
franchise by yourself or with partners?
||Will you need
financing and, if so, where can you obtain it?
||Do you have a
favorable credit rating?
||Do you have savings or
additional income to live on while starting your franchise?
- Your Abilities
||Does the franchise
require technical experience or relevant education, such as auto repair, home
and office decorating, or tax preparation?
||What skills do you
have? Do you have computer, bookkeeping, or other technical skills?
knowledge or talents can you bring to a business?
||Have you ever owned or
managed a business?
- Your Goals
||What are your goals?
||Do you require a
specific level of annual income?
||Are you interested in
pursuing a particular field?
||Are you interested in
retail sales or performing a service?
||How many hours are you
willing to work?
||Do you want to operate
the business yourself or hire a manager?
ownership be your primary source of income or will it supplement your current
||Would you be happy
operating the business for the next 20 years?
||Would you like to own
several outlets or only one?
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.
- 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?
- 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 the
- 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
- Name Recognition
- A primary reason for purchasing a franchise
is the right to associate with the company's name. The more widely recognized
the name, the more likely it will draw customers who know its products or
services. Therefore, before purchasing a franchise, consider:
||The company's name and
how widely recognized it is. -- If it has a registered trademark.
||How long the
franchisor has been in operation.
||If the company has a
reputation for quality products or services.
||If consumers have
filed complaints against the franchise with the Better Business Bureau or a
local consumer protection agency.
- Training and Support
- Another reason for purchasing a franchise is
to obtain support from the franchisor. What training and ongoing support does
the franchisor provide? How does their training compare with the training for
typical workers in the industry? Could you compete with others who have more
formal training? What backgrounds do the current franchise owners have? Do they
have prior technical backgrounds or special training that helps them succeed?
Do you have a similar background?
- Franchisor's Experience
- Many franchisors operate well-established
companies with years of experience both in selling goods or services and in
managing a franchise system. Some franchisors started by operating their own
business. There is no guarantee, however, that a successful entrepreneur can
successfully manage a franchise system.
Carefully consider how long the franchisor
has managed a franchise system. Do you feel comfortable with the franchisor's
expertise? If franchisors have little experience in managing a chain of
franchises, their promises of guidance, training, and other support may be
- A growing franchise system increases the
franchisor's name recognition and may enable you to attract customers. Growth
alone does not ensure successful franchisees; a company that grows too quickly
may not be able to support its franchisees with all the promised support
services. Make sure the franchisor has sufficient financial assets and staff to
support the franchisees.
Shopping at a Franchise
Attending a franchise exposition allows you to view and compare a
variety of franchise possibilities. Keep in mind that exhibitors at the
exposition primarily want to sell their franchise systems. Be cautious of
salespersons who are interested in selling a franchise that you are not
Before you attend, research what type of
franchise best suits your investment limitations, experience, and goals. When
you attend, comparison shop for the opportunity that best suits your needs and
- Know How Much You Can
- An exhibitor may tell you how much you can
afford to invest or that you can't afford to pass up this opportunity. Before
beginning to explore investment options, consider the amount you feel
comfortable investing and the maximum amount you can afford.
- Know What Type of Business is Right
- An exhibitor may attempt to convince you
that an opportunity is perfect for you. Only you can make that determination.
Consider the industry that interests you before selecting a specific franchise
system. Ask yourself the following questions:
||Have you considered
working in that industry before?
||Can you see yourself
engaged in that line of work for the next twenty years?
- Do you have the necessary background
- If the industry does not appeal to you or
you are not suited to work in that industry, do not allow an exhibitor to
convince you otherwise. Spend your time focusing on those industries that offer
a more realistic opportunity.
- Comparison Shop
- Visit several franchise exhibitors engaged
in the type of industry that appeals to you. Listen to the exhibitors'
presentations and discussions with other interested consumers. Get answers to
the following questions:
||How long has the
franchisor been in business?
||How many franchised
outlets currently exist? Where are they located?
||How much is the
initial franchise fee and any additional start-up costs? Are there any
continuing royalty payments? How much?
technical, and ongoing assistance does the franchisor offer?
||What controls does the
Exhibitors may offer you prizes, free samples, or free dinners if
you attend a promotional meeting later that day or over the next week to
discuss the franchise in greater detail. Do not feel compelled to attend.
Rather, consider these meetings as one way to acquire more information and to
ask additional questions. Be prepared to walk away from any promotion if the
franchise does not suit your needs.
- Get Substantiation for Any Earnings
- Some franchisors may tell you how much you
can earn if you invest in their franchise system or how current franchisees in
their system are performing. Be careful. The FTC requires that franchisors who
make such claims provide you with written substantiation. This is explained in
more detail in the section "Investigating Franchise
Offers." Make sure you ask for and obtain written substantiation for any
income projections, or income or profit claims. If the franchisor does not have
the required substantiation, or refuses to provide it to you, consider its
claims to be suspect.
- Take Notes
- It may be difficult to remember each
franchise exhibit. Bring a pad and pen to take notes. Get promotional
literature that you can review. Take the exhibitors' business cards so you can
contact them later with any additional questions.
- Avoid High Pressure Sales
- You may be told that the franchisor's
offering is limited, that there is only one territory left, or that this is a
one-time reduced franchise sales price. Do not feel pressured to make any
commitment. Legitimate franchisors expect you to comparison shop and to
investigate their offering. A good deal today should be available tomorrow.
- Study the Franchisor's
- Do not sign any contract or make any payment
until you have the opportunity to investigate the franchisor's offering
thoroughly. As will be explained further in the next section, the
Rule requires the franchisor to provide you with a disclosure document
containing important information about the franchise system. Study the
disclosure document. Take time to speak with current and former franchisees
about their experiences. Because investing in a franchise can entail a
significant investment, you should have an attorney review the disclosure
document and franchise contract and have an accountant review the company's
Before investing in any franchise system, be sure to get a copy of
the franchisor's disclosure document. Sometimes this document is called a
Franchise Offering Circular. Under the
Rule, you must receive the document at least 10 business days before you
are asked to sign any contract or pay any money to the franchisor. You should
read the entire disclosure document. Make sure you understand all of the
provisions. The following outline will help you to understand key provisions of
typical disclosure documents. It also will help you ask questions about the
disclosures. Get a clarification or answer to your concerns before you invest.
- Business Background
- The disclosure document identifies the
executives of the franchise system and describes their prior experience.
Consider not only their general business background, but their experience in
managing a franchise system. Also consider how long they have been with the
company. Investing with an inexperienced franchisor may be riskier than
investing with an experienced one.
- Litigation History
- The disclosure document helps you assess the
background of the franchisor and its executives by requiring the disclosure of
prior litigation. The disclosure document tells you if the franchisor, or any
of its executive officers, has been convicted of felonies involving, for
example, fraud, any violation of franchise law or unfair or deceptive practices
law, or are subject to any state or federal injunctions involving similar
misconduct. It also will tell you if the franchisor, or any of its executives,
has been held liable or settled a civil action involving the franchise
relationship. A number of claims against the franchisor may indicate that it
has not performed according to its agreements, or, at the very least, that
franchisees have been dissatisfied with the franchisor's performance. Be aware
that some franchisors may try to conceal an executive's litigation history by
removing the individual's name from their disclosure documents.
- The disclosure document tells you if the
franchisor or any of its executives have recently been involved in a
bankruptcy. This will help you to assess the franchisor's financial stability
and general business acumen and predict if the company is financially capable
of delivering promised support services.
- The disclosure document tells you the costs
involved to start one of the company's franchises. It will describe any initial
deposit or franchise fee, which may be non-refundable, and costs for initial
inventory, signs, equipment, leases, or rentals. Be aware that there may be
other undisclosed costs. The following checklist will help you ask about
potential costs to you as a franchisee.
both to local and national advertising funds.
||Grand opening or other
initial business promotions.
||Business or operating
||Product or service
||Real estate and
equipment such as a computer system or business alarm system.
||Compliance with local
ordinances, such as zoning, waste removal, and fire and other safety codes.
||Employee salaries and
It may take several months or longer to get your business started.
Consider in your total cost estimate operating expenses for the first year and
personal living expenses for up to two years. Compare your estimates with what
other franchisees have paid and with competing franchise systems. Perhaps you
can get a better deal with another franchisor. An accountant can help you to
evaluate this information.
- Your franchisor may restrict how you operate
your outlet. The disclosure document tells you if the franchisor limits:
||The supplier of goods
from whom you may purchase.
||The goods or services
you may offer for sale.
||The customers to whom
you can offer goods or services.
||The territory in which
you can sell goods or services.
Understand that restrictions such as these may significantly limit
your ability to exercise your own business judgment in operating your outlet.
- The disclosure document tells you the
conditions under which the franchisor may terminate your franchise and your
obligations to the franchisor after termination. It also tells you the
conditions under which you can renew, sell, or assign your franchise to other
- Training and Other
- The disclosure document will explain the
franchisor's training and assistance program. Make sure you understand the
level of training offered. The following checklist will help you ask the right
||How many employees are
eligible for training?
||Can new employees
receive training and, if so, is there any additional cost?
||How long are the
||How much time is spent
on technical training, business management training, and marketing?
||Who teaches the
training courses and what are their qualifications?
||What type of ongoing
training does the company offer and at what cost?
||Whom can you speak to
if problems arise?
||How many support
personnel are assigned to your area?
||How many franchisees
will the support personnel service?
||Will someone be
available to come to your franchised outlet to provide more individual
The level of training you need depends on your own business
experience and knowledge of the franchisor's goods and services. Keep in mind
that a primary reason for investing in the franchise, as opposed to starting
your own business, is training and assistance. If you have doubts that the
training might be insufficient to handle day-to-day business operations,
consider another franchise opportunity more suited to your background.
- You often must contribute a percentage of
your income to an advertising fund even if you disagree with how these funds
are used. The disclosure document provides information on advertising costs.
The following checklist will help you assess whether the franchisor's
advertising will benefit you.
||How much of the
advertising fund is spent on administrative costs?
||Are there other
expenses paid from the advertising fund?
||Do franchisees have
any control over how the advertising dollars are spent?
promotions has the company already engaged in?
developments are expected in the near future?
||How much of the fund
is spent on national advertising?
||How much of the fund
is spent on advertising in your area?
||How much of the fund
is spent on selling more franchises?
||Do all franchisees
contribute equally to the advertising fund?
||Do you need the
franchisor's consent to conduct your own advertising?
||Are there rebates or
advertising contribution discounts if you conduct your own advertising?
||Does the franchisor
receive any commissions or rebates when it places advertisements? Do
franchisees benefit from such commissions or rebates, or does the franchisor
profit from them?
- Current and Former
- The disclosure document provides important
information about current and former franchisees. Determine how many franchises
are currently operating. A large number of franchisees in your area may mean
increased competition. Pay attention to the number of terminated franchisees. A
large number of terminated, cancelled, or non-renewed franchises may indicate
problems. Be aware that some companies may try to conceal the number of failed
franchisees by repurchasing failed outlets and then listing them as
If you buy an existing outlet, ask the
franchisor how many owners operated that outlet and over what period of time. A
number of different owners over a short period of time may indicate that the
location is not a profitable one, or that the franchisor has not supported that
outlet with promised services.
The disclosure document gives you the names
and addresses of current franchisees and franchisees who have left the system
within the last year. Speaking with current and former franchisees is probably
the most reliable way to verify the franchisor's claims. Visit or phone as many
of the current and former franchisees as possible. Ask them about their
experiences. See for yourself the volume and type of business being done.
The following checklist will help you ask
current and former franchisees such questions as:
||How long has the
franchisee operated the franchise?
||Where is the franchise
||What was their total
||Were there any hidden
or unexpected costs?
||How long did it take
them to cover operating costs and earn a reasonable income?
||Are they satisfied
with the cost, delivery, and quality of the goods or services sold?
||What were their
backgrounds prior to becoming a franchisee?
||Was the franchisor's
assistance does the franchisor provide?
||Are they satisfied
with the franchisor's advertising program?
||Does the franchisor
fullfill its contractual obligations?
||Would the franchisee
invest in another outlet?
||Would the franchisee
recommend the investment to someone with your goals, income requirements, and
Be aware that some franchisors may give you a separate reference
list of selected franchisees to contact. Be careful. Those on the list may be
individuals who are paid by the franchisor to give a good opinion of the
- Earnings Potential
- You may want to know how much money you can
make if you invest in a particular franchise system. Be careful. Earnings
projections can be misleading. Insist upon written substantiation for any
earnings projections or suggestions about your potential income or sales.
Franchisors are not required to make
earnings claims, but if they do, the
Rule requires franchisors to have a reasonable basis for these claims and
to provide you with a document that substantiates them. This substantiation
includes the bases and assumptions upon which these claims are made. Make sure
you get and review the earnings claims document. Consider the following in
reviewing any earnings claims.
- Sample Size. A franchisor may
claim that franchisees in its system earned, for example, $50,000 last year.
This claim may be deceptive, however, if only a few franchisees earned that
income and it does not represent the typical earnings of franchisees. Ask how
many franchisees were included in the number.
- Average Incomes. A franchisor
may claim that the franchisees in its system earn an average income of, for
example, $75,000 a year. Average figures like this tell you very little about
how each individual franchisee performs. Remember, a few, very successful
franchisees can inflate the average. An average figure may make the overall
franchise system look more successful than it actually is.
- Gross Sales. Some franchisors
provide figures for the gross sales revenues of their franchisees. These
figures, however, do not tell you anything about the franchisees' actual costs
or profits. An outlet with a high gross sales revenue on paper actually may be
losing money because of high overhead, rent, and other expenses.
- Net Profits. Franchisors often
do not have data on net profits of their franchisees. If you do receive net
profit statements, ask whether they provide information about company-owned
outlets. Company-owned outlets might have lower costs because they can buy
equipment, inventory, and other items in larger quantities, or may own, rather
than lease their property.
- Geographic Relevance. Earnings
may vary in different parts of the country. An ice cream store franchise in a
southern state, such as Florida, may expect to earn more income than a similar
franchise in a northern state, such as Minnesota. If you hear that a franchisee
earned a particular income, ask where that franchisee is located.
- Franchisee's Background. Keep
in mind that franchisees have varying levels of skills and educational
backgrounds. Franchisees with advanced technical or business backgrounds can
succeed in instances where more typical franchisees cannot. The success of some
franchisees is no guarantee that you will be equally successful.
- Financial History
- The disclosure document provides you with
important information about the company's financial status, including audited
financial statements. Be aware that investing in a financially unstable
franchisor is a significant risk; the company may go out of business or into
bankruptcy after you have invested your money.
Hire a lawyer or an accountant to review
the franchisor's financial statements. Do not attempt to extract this important
information from the disclosure document unless you have considerable
background in these matters. Your lawyer or accountant can help you understand
||Does the franchisor
have steady growth?
||Does the franchisor
have a growth plan?
||Does the franchisor
make most of its income from the sale of franchises or from continuing
||Does the franchisor
devote sufficient funds to support its franchise system?
Additional Sources of
Before you invest in a franchise system, investigate the
franchisor thoroughly. In addition to reading the company's disclosure document
and speaking with current and former franchisees, you should speak with the
- Lawyer and Accountant
- Investing in a franchise is costly. An
accountant can help you understand the company's financial statements, develop
a business plan, and assess any earnings projections and the assumptions upon
which they are based. An accountant can help you pick a franchise system that
is best suited to your investment resources and your goals.
Franchise contracts are usually long and
complex. A contract problem that arises after you have signed the contract may
be impossible or very expensive to fix. A lawyer will help you to understand
your obligations under the contract, so you will not be surprised later. Choose
a lawyer who is experienced in franchise matters. It is best to rely upon your
own lawyer or accountact, rather than those of the franchisor.
- Banks and Other Financial
- These organizations may provide an unbiased
view of the franchise opportunity you are considering. Your banker should be
able to get a Dun and Bradstreet report or similar reports on the franchisor.
- Better Business Bureau
- Check with the local Better Business Bureau
(BBB) in the cities where the franchisor has its headquarters. Ask if any
consumers have complained about the company's products, services, or personnel.
- Government Departments
- Several states regulate the sale of
franchises. Check with your state Division of Securities or Office of Attorney
General for more information about your rights as a franchise owner in your
- Federal Trade Commission
- The FTC publishes other information that may
be of interest to you, including business guides like Getting Business Credit
and Buying by Phone.
The FTC works for the consumer
to prevent fraudulent, deceptive and unfair business practices in the
marketplace and to provide information to help consumers spot, stop and avoid
them. To file a complaint or to get free
information on consumer
issues, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the
complaint form. The FTC enters Internet, telemarketing, identity
theft and other fraud-related complaints into
Consumer Sentinel, a secure,
online database available to hundreds of civil and criminal law enforcement
agencies in the U.S. and abroad.