Becoming your own boss has its perks, but launching your own business can be risky. Franchising can give potential business owners the best of both worlds — the ability to
run their company without many of the trial and errors inherent in building a business from the ground up.

Franchisees have the benefit of selling a well-known and tested brand-name product. They often have access to tested marketing strategies and business plans and easier access to financing than those that are starting their own businesses. Under agreements, franchisees pay for the right to market a product under the brand name of the franchisor. The franchisor provides training and advertising to the franchisee in exchange for initial and ongoing fees.

Dave Underwood, CEO of 2GT Inc., parent company of Two Guys and a Truck moving company, went through the risky process of opening his own business more than 30 years ago. Now he’s selling franchises — hoping he can help potential business owners avoid the ups and downs of starting a business. “I’ve made all the mistakes for you,” says Underwood. “We have over 100 years combined experience, and we can show you how to run the business. We’ve run into any situation that you can think of in business.”

Franchising is also beneficial for the franchisor — it’s a good way for a company to grow its business without needing to provide the financing up front. Underwood’s franchisees have been able to get all of the financing they needed.

Franchises are not for everyone, however. Franchise agreements use restrictions that franchise owners may see as prohibitive. The agreements often specify pricing and geographical territories. Ongoing royalties and advertising fees must be paid by the franchisee. In addition, if another franchisee or the franchisor makes a mistake that tarnishes the brand name, your business can suffer.

As with any business, if you are interested in purchasing a franchise, make sure you do your research. Potential franchisees should use business news sources and franchising Web sites to investigate franchisors. Determine the number of franchises the franchisor has, the success rate of franchises, the company’s financial health and earnings projections, and whether the business has any pending lawsuits against it.

After narrowing potential franchisors down, another great source is the Uniform Franchising Offering Circular (UFOC.) Under federal law, franchisors must provide potential franchisees with a copy of the UFOC before it can offer to sell a franchise. This document will include information on the franchisor, its staff, management experience with franchises, fees associated with the franchise, territory rights and other franchises in the business with contact information.

The UFOC also includes the franchise agreement, which is the legal outline of the franchisor-franchisee relationship. Always use the advice of an experienced franchise attorney to help evaluate a company’s potential as a franchise and to review the franchise agreement.

Most franchise agreements include the following:

Initial investment to operate the franchise

Ongoing royalties paid to the franchisor

Training the franchisor will provide

Franchisee’s assigned geographical territory

Brand name and trademark agreements

Operating guidelines

Cancellation and renewal terms

Resle agreements

Under franchise agreements, franchisees pay the franchisor royalties for using his or

her business plan and marketing features. Franchise agreements outline the legal

relationship between the franchisor and the franchisee. The agreements will differ

depending on the business, but most agreements outline the training franchisors will

provide, the assigned territory of the franchisee and whether it is exclusive, the

initial franchise investment fee, royalties the franchise must pay (typically 4 to 8

percent), operation guidelines and cancellation and renewal terms. Franchise agreements

should always be reviewed by an attorney familiar with franchises.

Resources:

International Franchise Organization
http://www.franchise.org

The Franchise Registry
http://www.franchiseregistry.com

FRANdata Corp.
http://www.frandata.com