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Marketing Research Process
A Consumer Guide to Buying a Franchise
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 Franchise Ownership
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
- 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, 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.
- 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 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.
- 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 repairs.
- 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
- 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
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.
- 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?
- 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 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
- 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
- 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 Business
- 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 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 unreliable.
- 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 Exposition
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 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
- 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. 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 disclosures.
Investigating Franchise Offerings
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 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.
- Continuing royalty payments.
- Advertising payments, both to local
and national advertising funds.
- Grand opening or other initial
- Business or operating licenses.
- Product or service supply costs.
- Real estate and leasehold
- 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
- Your franchisor may restrict how you
operate your outlet. The disclosure document tells you if the franchisor
- The supplier of goods from whom you
- The goods or services you may offer
- 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 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
- 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
- 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 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.
- 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?
- 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
- 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. 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 company-owned
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
- Where is the franchise located?
- What was their total investment?
- Were there any hidden or unexpected
- 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
- What ongoing assistance does the
- Are they satisfied with the
franchisor's advertising program?
- Does the franchisor fullfill its
- Would the franchisee invest in
- 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 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
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
- Does the franchisor have a growth
- 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 Information
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
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.