Small Business Builder: Franchises, Part 3

— -- Take a look at what your parent company is required to give you if you join the fold, and it’s easy to see why many new entrepreneurs prefer to buy a franchise instead of starting a business from scratch.

From a marketing plan and an insurance package to a peek at how your brother and sister franchisees are doing, you’ll receive valuable information and advice that is already been tested and refined.

Hire Attorneys, Accountants

In its online “franchise workshops,” the Small Business Administration offers a thorough education on the legal and financial responsibilities of franchising. These can easily overwhelm even longtime business owners, so nearly all franchise experts recommend that you work with experienced attorneys and accountants when you’re ready to buy.

Roger Rule, writing in The Franchise Redbook, says one of the biggest mistakes made by franchisees is “not getting sound legal advice.” Rule recommends that an attorney go over every document in the franchise agreement and goes so far as to suggest that prospective owners tape all conversations (with other participants’ permission) to create a permanent record of oral agreements.

In the United States, franchising is subject to the Federal Trade Commission Rule on Franchising and Business Opportunity Ventures. Once you’ve indicated serious interest in a franchise, the FTC requires the franchiser to give you a copy of the commission’s Uniform Franchise Offering Circular (UFOC). (Check with your state’s corporation commission for additional laws and requirements.)

Check the UFOC Packet

At least 10 days before signing a franchise agreement, or at your first face-to-face meeting with the organization’s representatives, you should receive the UFOC package, which includes:

A copy of the franchise agreement.

A territory map. Be sure to clarify whether you’re contracting for territorial rights to a single franchise or several franchises, or for an entire area. Does your agreement give you the right of first refusal for new areas? What are the limitations on the company's other franchises in your area?

The franchiser’s financial statements, including success rates of existing franchises.

A detailed estimate and explanation of start-up costs, including starting inventory.

Specifics and payment schedules for all required licensing and promotional fees, royalties, shared advertising and other expenses.

Guidelines on audits and assignment procedures, including the approval process and ownership rights if you decide to sell the franchise down the road.

A detailed marketing plan and recommended “grand opening” program.

An insurance plan, including coverage for fire, inventory, theft, worker’s compensation, accident and health, and general liability. If your franchise requires the use of a vehicle, the parent organization should also offer automobile insurance.

Guidelines for purchasing inventory and equipment, along with terms and restrictions on such items, and a comparison of the franchiser’s prices and those of other suppliers.

Requirements for day-to-day operations. For example, are you obligated to stay open on certain days for specific hours?

Most Organizations Offer More

In addition, the franchise organization should provide: Area site-development assistance, including demographic profiles of franchise customers and the targeted sites.

At least one week of training for you and your manager in one of the parent operating stores. Most franchise organizations, however, offer much more. At Mailboxes Etc., for example, new franchisees receive a four-week training program, including two weeks of classroom instruction and two weeks of in-center training.

A franchise operating manual.

Promotional materials, including the organization’s trademark logo, signage and in-store displays.

Ongoing support once your franchise opens, including continuing education.

For your franchise to prosper, the mix should include a passion for the type of business you’ve chosen, enjoyment of the work, compatibility with the franchiser’s work ethic and mission, and a clearly defined contract. But the key ingredient is often nothing more exotic than money. A 1995 study by the Georgia Institute of Technology indicated that one of the biggest factors in franchise success was the number of outlets; the more locations in your network, the better. Other success predictors, according to the study, were the amount of the initial investment and the number of locations added per year. In franchising, it seems, as in most other business models, a healthy business is a growing business.

An editor since the age of 6, when she returned a love letter with corrections marked in red, Mary Campbell founded Zero Gravity in 1984 to provide writing, editing and marketing services. She is the marketing director for the online university, Magellan.edu.

Small Business Builder is published on Wednesdays.