A Guide to Franchising - Page 3 of 3

A Guide to Franchising

A franchise agreement details the terms of the relationship between the franchisor and franchisee. Once you make your pick, use the FDD to gather information about the company’s track record of success, financial strength, number of years in operation, training and ongoing support, business background of key executives, any prior litigation, and costs to get started. The report also informs you of any restrictions placed on the franchisee such as certain suppliers from which you must purchase products or the territories where you are allowed to sell your goods and services. IFA President and CEO Matthew Shay suggests enlisting the help of an attorney when reviewing the document. “Understanding the legal language of franchising can be daunting because franchising is governed by federal and state laws. Plus there may be local and state health and environmental laws that a franchisee must follow,” Shay says. “So, it is important to seek out the advice of an experienced franchise attorney to ensure that you are aware of all the laws that apply in your areas and state.” You may also want to consult an accountant to review the company’s financials.

Interview existing franchisees. The FDD lists the names and addresses of current franchise owners and those who have left the system in the past year. Talk to a few to help verify a franchisor’s claims and to find out about their experiences. Some questions you should ask include: Did the franchisor provide adequate training and ongoing support? Is the business profitable? What are the biggest challenges you faced? Are you satisfied with the franchisor’s advertising program? Were there any hidden or unexpected costs? For those who have left the system, find out why they left, whether they would consider returning, and what their overall experience was like.

Find financing. Many franchises have working relationships with banks and other lenders. Contact the franchisor to see what kind of financial assistance it can provide. The Small Business Administration is also a good source. In fact, the Franchise Registry lists all of the franchise systems that have been approved for SBA lending. The Brock sisters used an SBA business loan to cover 65% to 75% of their costs. They used personal savings, home equity, and credit cards to finance the rest.