How to Invest in Franchises

Learn about franchises by attending a trade show.

Learn about franchises by attending a trade show.

Owning your own franchise is one way to earn a living and is particularly attractive when unemployment is high. A franchise enables you to be a business owner by paying a franchise fee, which allows you to sell goods or services under a recognized name. You also receive training based on a system that is already in place. Franchises reduce your risk of starting a new business from scratch, but there is no guarantee that you will be successful. Franchises require you to put in long hours, work hard and put up a substantial investment. Before you jump in, learn all you can.

Research and compare franchises using a franchise ranker, such as the “Franchise 500,” offered by Entrepreneur. The “Franchise 500” ranks and compiles the top 500 franchises in terms of their financial and statistical data. You should consider the financial stability, growth rate, size and startup costs of the franchise.

Visit the franchises that interest you. Contact the owner and see if she can answer any of your questions.

Attend a franchise trade show, such as the International Franchise Expo, and talk to some franchise owners there.

Get information about the franchises you like from their own websites. Request information directly from the franchisor. You want to find out how long the franchisor has been in business, how many outlets it has, where the outlets are, what the fees are, what kind of management and technical support the franchise offers and what controls it imposes.

Determine whether there is a demand for your franchise of choice in your area. Check to see whether there is competition.

Put together the required capital to open the franchise. Besides the initial franchise fee, you may have to rent equipment or buy inventory. You may be required to have a grand opening to promote your franchise, which involves more money. You might have to pay royalties and contribute to an advertising fund. Determine how much money you have to invest and how much you can afford to lose.

Select a site for your franchise. The franchisor may already have a list of approved sites or will have to approve yours.

Obtain a copy of the franchisor’s disclosure document. You must get this document 14 days prior to signing any contracts or paperwork under the Franchise Rule, enforced by the Federal Trade Commission. The disclosure document should contain the franchisor’s background, the business background, whether the franchise has ever gone through bankruptcy, initial and ongoing costs, restrictions, terminations, training, advertising, information about current and former franchisees and earnings potential.

Enlist the help of an attorney or a certified public accountant to help you with legal and financial documents, such as the disclosure document, related to your franchise of interest.

Tip

  • Some franchises require you to have technical experience or special training, such as auto repair or tax preparation. Make sure you have this training first. Management experience or training is also helpful.

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