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Investing in Franchises: Answers to Common Questions

Are you a recently retired individual looking to stay involved and productive in the world of business? Investing in a franchise is a fantastic way to stay invested in the field while keeping your days busy. Investing into a franchise, however, can be a highly involved and complex process. To help understand more of the involved steps and thought processes that need to be taken before investing into a franchise, the International Franchise Professionals Group (IFPG) has compiled some of the most frequently asked questions to help those investing into a franchise have a better understanding of the process.

1. What are the common steps for franchising?

The first step in franchising is to research various franchises and create a list of potential franchises you’d like to invest in. Keep in mind that the entire process can involve legal documents and disclosure regulations, so ensure that you understand all of the details before moving forward. Following the research process, contact the franchisors and become familiar with their system to make sure it’s a good fit for you. Once you are confident in your investment decision, draft a renouncement letter agreeing to the franchise agreement. Secure financing for your franchise and sign the documents legally binding you to the new franchise once they are reviewed by the franchisor. Finally, you will be given assistance by the franchise in order to get the business running.

2. What are the advantages of owning a franchise?

One distinct advantage to owning a franchise is that you are able to have a business of your own without having to develop a business form scratch. Your franchisor will provide you with a blueprint to succeed in the form of operations manuals and training. You do not have to reinvent the wheel when it comes to marketing; franchisors typically provide access to a marketing plan with brand recognition already in place. Many franchise agreements are a month to month agreement allowing you to leave the franchise agreement in the event of an emergency or when you have met your goals. Lastly, you are able to save time and energy since the franchisor is able to handle the booking and administrative details.

3. What are the drawbacks of owning a franchise?

An important factor to consider prior to signing a franchise agreement is the limited control you have over certain points such as set pricing, product, services, policies, and operational regulations. You are also obligated to pay royalties and marketing fees as outlined in the contract; unpaid fees can result in the termination of your franchise agreement. You will also be required to follow the franchisor’s operations style and look and feel of the business, meaning that you have limited creative control over how you run your business. Another disadvantage is that you have to work with a partner – the franchisor. Therefore, selecting the right franchisor is key.

4. How much does it cost to buy a franchise?

The cost for franchising varying by the type of franchise you are interested in. The franchise fee can be anywhere between $10,000 and $100,000. The franchisee is also responsible for the cost associated with opening the business, such as inventory, equipment, supplies, design, branding and advertising. Ongoing fees are typically set in the franchise agreement, such as a percentage of sales and monthly fees. It is wise to reserve additional funds for running the franchise that include unexpected expenses and overhead.

5. What should I consider when selecting the right franchise?

Do your research on the industry you are interested in. Ask yourself a few questions, such as: is this opportunity a good match for my interests and skills? What do I have to bring to the table? What kind of support and ongoing training will I receive from the franchisor? What sets this franchise apart from others in the industry? What is the agreement for payment structure and duration? What are the restrictions that the agreement outlines? When are the royalties due?

6. What is a franchise disclosure document and do I need one?

The franchise disclosure document (FDD) is a document required by the Federal Trade Commission and state franchise regulations that must be presented to potential franchisees to empower them to make informed investments. It typically includes the franchisor’s earnings claims, past litigation, and review of financial obligations and commitments. All franchisors are required to provide this to prospective franchisees to comply with the FTC regulations.

There are many questions to ask when considering investing into a franchise. Although a long and involved process, if done right, investing into a franchise can be a highly rewarding endeavor with potentially successful outcomes. When selecting the right franchise for you, make sure to do thorough research and ask all the right questions.

Topics:

Investing in Franchises,

Franchise Disclosure Document,

Franchise Costs

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