Franchise Center

Franchise Center

Start your own business:

Women's Business Centers

Each women's business center provides assistance and training in finance, management, marketing, procurement and the Internet, as well addressing specialized topics such as home-based businesses, corporate executive downsizing and welfare-to-work. All provide individual business counseling and access to the SBA's programs and services; a number are also intermediaries for the SBA's MicroLoan and Loan Prequalification programs. Each WBC tailors its programs to the needs of its constituency; many offer programs and counseling in two or more languages. The following is contact information and a brief description of each WBC. onlinewbc.gov/wbc.pdf.

The FTC's Guide to Buying a Franchise

The Benefits and Responsibilities of Franchise Ownership

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. Like any investment, purchasing a franchise is not a guarantee of success. To help you evaluate whether owning a franchise is right for you, the Federal Trade Commission has prepared this guide. More information about franchising can be obtained by visiting the FTC's home page.

A franchise typically enables you, the investor or franchisee, to operate a business. By paying a franchise fee, 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.

Below is an outline of several components of a typical franchise system.

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 fees.

Initial franchise fee and other expenses:

Your initial franchise fee, may cost several thousand to several hundred thousand dollars. You may also incur costs to rent, build and equip an outlet. 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. You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. You often 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.

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.

Controls:

To ensure uniformity, franchisors typically control how franchisees conduct business. 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.

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.

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. The franchisor may require purchase from an approved supplier, even if you can buy similar goods elsewhere.

Sales area:

Franchisors may limit your business to a specific territory. These territorial restrictions ensure that other franchisees will not compete with you for the same customers.

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.

Renewals:
Franchise agreements typically run for 15 to 20 years. After that time, you must renew your contract. Also be aware that renewals may not provide the original terms and conditions.

Before Selecting a Franchise System:
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.

1. 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?
2. 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?
3. 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?
   • 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 one?

Selecting a Franchise:

When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, competition, the franchisor's background and the level of support you will receive.

Demand:

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?

Competition:

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 Business:

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 agency.

Training and Support Services:

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. Carefully consider how long the franchisor has managed a franchise system. Do you feel comfortable with the franchisor's expertise?

Growth:

A growing franchise system increases the franchisor's name recognition and may enable you to attract customers. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.

Shopping at a Franchise Exposition:

Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Be cautious of salespersons who are interested in selling a franchise that you are not interested in. 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 questions.

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 You

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 or skills? 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?
• 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 Representations:

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. The FTC requires that franchisors that make such claims provide you with written substantiation. This is explained in more detail in the section Investigating Franchise Offers. Obtain a written substantiation for any income projections, or income or profit claims.

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:

Do not feel pressured to make any commitment. Legitimate franchisors expect you to comparison shop and to investigate their offering.

Study the Franchisor's Offering:

The FTC's Franchise Rule requires the franchisor to provide you with a disclosure document containing important information about the franchise system. Take time to speak with current and former franchisees about their experiences. An attorney should review the disclosure document and franchise contract and have an accountant review the company's financial disclosures.

Investigating Franchise Offerings

Before investing in any franchise system, obtain a copy of the franchisor's disclosure document. This document is sometimes 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. The following outline will help you to understand key provisions of typical disclosure documents.

Business Background:

The disclosure document identifies the executives of the franchise system and describes their prior experience. Consider their general business background and experience in managing a franchise system. Also consider how long they have been with the company.

Litigation History:

The disclosure document allows you to 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.

Bankruptcy:

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.

Costs:

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.

Employee salaries and benefits:

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. An accountant can help you to evaluate this information.

Restrictions:

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.

Terminations:

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 questions:

• 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 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?
• Also, 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 background.

Advertising:

You often must contribute a percentage of your income to an advertising fund. 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?
• 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 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 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. 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. The disclosure document gives you the names and addresses of current franchisees and franchisees that 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. 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 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 a franchisee?
• Was the franchisor's training adequate?
• What ongoing assistance does the franchisor provide?
• Are they satisfied with the franchisor's advertising program?
• Does the franchisor fulfill its contractual obligations?
• Would the franchisee invest in another outlet?
• Would the franchisee recommend the investment to someone with your goals, income requirements, and background?

Earnings Potential:

You may want to know how much money you can make if you invest in a particular franchise system. Receive a 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.

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 the following:

• 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?

Lawyer and Accountant:

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.

Banks and Other Financial Institutions:

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. For a single free copy of these and Best Sellers, a list of more than 100 free FTC publications on various consumer and business topics, write: Public Reference, Federal Trade Commission, Washington, DC 20580; (202) 326- 2222. TDD: (202) 326-2502. If you have questions or problems about franchises, write: Correspondence Branch, Federal Trade Commission, Washington, DC 20580. While the FTC does not resolve individual disputes, your comments help in its law enforcement efforts.

To obtain more information about franchising opportunities, visit the FTC web site.

The SBA's Business Plan Outline

A business plan is an essential first step in starting your own business. Not only will most lenders/investors require it, but a business plan is an invaluable tool to help you evaluate whether your idea has commercial merit and to help you in organizing what will be a very complicated process. If the sales process is extensive. The financial condition of the buyer should also figure heavily when determining the appropriate payment terms.

Below is a sample outline for a business plan prepared by the Small Business Association (SBA). Use this model as a guide when developing the business plan for your franchise or business. Above you will find a link to the SBA home page where you can download free programs to help you prepare a comprehensive business plan.

Sample Outline For A Business Plan

Elements of a Business Plan:

1. Cover sheet
2. Statement of purpose
3. Table of contents
   • The Business:
     • Description of business
     • Marketing
     • Competition
     • Operating procedures
     • Personnel
     • Business insurance
     • Financial data
   • Financial Data:
     • Loan applications
     • Capital equipment and supply list
     • Balance sheet
     • Break-even analysis
     • Pro-Forma income projections (profit & loss statements)
       • Three-year summary
       • Detail by month first year
       • Detail by quarters, second and third years
       • Assumptions upon which projections were based
     • Pro-forma cash flow (follow same guidelines as for letter E)
   • Supporting Documents:
     • Tax returns of principals for last three years
     • Personal financial statement (all banks have these forms)
     • Copy of franchise contract and all supporting documents provided by the franchisor
     • Copy of proposed lease of purchase agreement for building space
     • Copy of licenses and other legal documents
     • Copy of resumes of all principals
     • Copies of letters of intent from suppliers, vendors, etc.

For more information about starting your own business and other SBA programs and financing opportunities, visit the SBA's home page at www.sba.gov.

Financing Your Own Business
SBA's Guide to Financing a Small Business or Franchise Opportunity:

SBA offers assistance to small business owners, including:

• Size standards
• Type of business standards
• Use of proceeds' issues
• Understanding the process involved in applying for an SBA loan
• Identifying documents necessary for completing an SBA loan application package

SBA also allows you to identify and understand credit issues such as:

• Equity investment
• Earnings requirements
• Working capital
• Collateral
• Resource management

All SBA programs are provided to the public on a nondiscriminatory basis.

For more information visit the SBA's home page.