A Consumer Guide to Buying a Franchise
Savvy Consumer: A Consumer Guide to Buying a Franchise
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 of success.
The Benefits and Responsibilities of
To 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 you invest.
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 following
- initial franchise 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
- continuing royalty 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.
- advertising 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
- 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.
- site 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.
- design or 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.
- restrictions on 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
- restrictions on 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.
- restrictions of 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.
- franchise 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.
- renewals. 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
- 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?
- What specialized 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
- Are you interested in pursuing a particular
- 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?
- Will franchise ownership be your primary
source of income or will it supplement your current income?
- Would you be happy operating the business for
the next 20 years?
- Would you like to own several outlets or only
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 costs?
- 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
- Training and Support Servcies
- 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 ask
- Know How Much You Can Invest
- 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 for
- 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
- Can you see yourself engaged in that line of
work for the next twenty years?
- Do you have the necessary background or
- 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
- 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
- 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?
- What management, technical, and ongoing
assistance does the franchisor offer?
- What controls does the franchisor impose?
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 Tactics
- 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 Offering
- 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 FTC's Franchise 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 financial
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 FTC's Franchise 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
- 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.
- Continuing royalty payments.
- Advertising payments, both to local and
national advertising funds.
- Grand opening or other initial business
- Business or operating licenses.
- Product or service supply costs.
- Real estate and leasehold improvements.
- Discretionary equipment such as a computer
system or business alarm system.
- Legal fees.
- Financial and accounting advice.
- Compliance with local ordinances, such as
zoning, waste removal, and fire and other safety codes.
- Health insurance.
- Employee salaries and benefits.
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
- The goods or services you may offer for sale.
- The customers to whom you can offer goods or
- The territory in which you can sell goods or
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 parties.
- Training and Other Assistance
- 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 training sessions?
- How much time is spent on technical training,
business management training, and marketing?
- Who teaches the training courses and what are
- 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
- How many franchisees will the support
- Will someone be available to come to your
franchised outlet to provide more individual assistance?
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
- 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
- Are there other expenses paid from the
- Do franchisees have any control over how the
advertising dollars are spent?
- What advertising promotions has the company
already engaged in?
- What advertising developments are expected in
the near future?
- How much of the fund is spent on national
- How much of the fund is spent on advertising
in your area?
- How much of the fund is spent on selling more
- Do all franchisees contribute equally to the
- 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 Franchisees
- 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
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
- Where is the franchise located?
- What was their total investment?
- 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
- Was the franchisor's training adequate?
- What ongoing assistance does the franchisor
- Are they satisfied with the franchisor's
- Does the franchisor fullfill its contractual
- Would the franchisee invest in another outlet?
- Would the franchisee recommend the investment
to someone with your goals, income requirements, and background?
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 company.
- 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 FTC's Franchise 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
- 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 royalties?
- 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 following:
- 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 state.
- Federal Trade Commission (FTC)
- 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.