What You Need to Know Before Purchasing a Franchise

  1. Why a consider purchasing a franchise
    1. Proven business model
    2. Market recognition
    3. Advertising strength
    4. Might be easier to finance

 

  1. A “Franchise” is an oral or written agreement, either express or implied, which provides all of the following[1]:
    1. Grants the right to distribute goods or provide services under a marketing plan prescribed or suggested in substantial part by the franchisor.
    2. Requires payment of a franchise fee to a franchisor or its Affiliate.
    3. Allows the franchise business to be substantially associated with a trademark, service mark, trade name, logotype, advertisement, or other commercial symbol of or designating the franchisor or its affiliate.

 

  • What a franchise is not
    1. A guaranty of success
    2. A job
    3. A recipe (but it might include recipes)
  1. Due diligence on Franchisor
    1. Check their financial capability
    2. Check their reputation
      1. Ask other current franchisees
      2. Ask business rating services like Better Business Bureau and/or Iowa Business and Industry
  • Ask FORMER franchisees
  1. Visit their facility and meet key individuals
  2. Check their longevity (how long have they been doing business)

 

  1. Due diligence on the FRANCHISEE—YOU (the buyer)
    1. Are you passionate about the business/industry
    2. Do you have experience
    3. Do you have the capacity to run the business
      1. Managerial capacity
      2. Available workforce
  • Financial capability
    1. Pay all the costs of the franchise
    2. Six month personal reserve

 

  1. Why is it better to buy a franchise than to start your own business
    1. What “power” does the franchise mark have in your market/in its industry
    2. What services does the franchisor offer
      1. Training
      2. Marketing
  • Operating plans

 

  • Franchise documents
    1. Governed by Federal law[2]
    2. Primary document is the Uniform Franchise Offering Circular
    3. What to look for in the franchise documents
      1. Pre-opening expenses
        1. Purchase of the franchise (normally $25,000 to $50,000)
        2. Franchisee training costs
        3. Site selection fees
        4. Signs/Displays/Trade dress
        5. Initial inventory
        6. Uniforms
      2. Rates and computations of the franchise fees
  • Required purchases from the franchisor
  1. Advertising requirements
  2. Insurance requirements
  3. Territory
    1. Exclusivity/Non-exclusivity
    2. National accounts
  • Termination
    1. Sales requirements
    2. Rights to transfer franchise
      1. Franchisor
        1. Commonly based on non-payment of fees
        2. Termination fee
      2. Franchisee- normally has no rights to terminate
  • Personal guarantees

[1] Iowa Code 523H.1(3)

[2] 16 Code of Federal Regulations Parts 436 and 437

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