Franchising

If you're serious about buying a franchise business then you need to fully understand the franchise agreement to avoid making a bad investment. As a franchisee you assume all the risk!

We've all bought products and services from franchises, and we all have a basic understanding of the industry. In fact, many of us have an intimate relationship with a number of franchises; every time we buy burgers, ice cream, pizza, cleaning services, and a ton of other goods and services, we do it from franchised outlets.

But what we see as customers is just the storefront of franchising. It's what happens in the backroom and how the product or service gets to the customer that we're going to explore in this article. The fact is, that process is often pretty ugly, and only by fully appreciating what can happen in franchising will you be able to lessen the chances of something equally ugly happening to you. There's no one single tactic that will enable you to do this, but rather you'll need use a whole series of actions, skills, and a particular mindset if you want to run a successful franchise operation.

The first thing you have to be aware of is that franchising is self-regulating. The International Franchise Association (IFA) was supposedly founded over dinner one evening in the 1960's by the heads of the leading franchises. The franchise industry was not yet established then, so these corporate bosses agreed to put up money to promote the image of an industry that had already been abused by unscrupulous businesspeople. The idea behind setting up the IFA was to lend credibility to a tarnished business model.

And it worked. One in sixteen Americans now works in a franchised business, and one-third of America's retail goods and services are now sold through franchised outlets. But this success has come at a cost. Many unsuspecting franchisees have lost their entire net worth through no fault of their own, while others have no control over their business and fewer rights than their employees.

This is because in the franchise industry, the franchisors set the rules. They write the Franchise Agreement, and they have the power to tell a franchisee "take it or leave it!" That's not an attitude that creates a healthy working relationship, let alone a partnership.

Of course, not all agreements and not all franchise companies are the same. There are a lot of nasty traps out there, but there also some great opportunities if you know how to tell the two apart. The difficulty is understanding the strengths and weaknesses of any franchise company so that you can make the right choice. How do you tell an unscrupulous franchisor from an honest one? The answer is due diligence.

As a potential franchisee, you have to fully understand every commitment you undertake. Assume nothing and be absolutely crystal clear about every point and every detail, and how each word in the Agreement could affect you while operating your franchise. That's a fundamental mistake in any business and a potentially fatal error in the franchise industry. In a franchise relationship, the franchisor makes no investment and takes no risk. It's all on your shoulders. It's in understanding these elements that will give you the knowledge and conviction to make the best investment of your life, instead of the worst mistake of your life.

Whatever kind of franchise you're thinking of buying, you will be investing and risking $50,000, $100,000, or even $200,000. It's your money and your equity that's at stake, not the franchisors. Chances are, whatever you invest will be a pretty serious chunk of your net worth and life savings. So it's up to you to fully understand the system if you intend to lessen your risk. If you can't do this yourself then you'd better get some professional help.

FRANCHISE SYSTEMS ARE CONTRACTUAL. If you don't understand the contract, you'll never understand the business! Franchise due diligence is the most important step in buying a franchise. Never invest in a franchise without having a thorough understanding of the Franchise Agreement and the Uniform Franchise Offering Circular!