July 21, 1997

Small Business Bulletins

Franchises need careful evaluation

Peter Neurath

You might believe that buying a franchise is a safer way to start a business, but there are pitfalls and things to consider before setting off down that road.

Franchises come with their own set or risks, warns the Puget Sound Society of Certified Financial Planners. "Franchises fail like any other business -- 35 percent within the first four years."

What's more, the franchisers themselves have been know to fail.

Also, keep in mind that a franchise operates under the restrictions of a larger corporation. "If you want autonomy, consider an independent business venture," said Reginald Tilley, representing the financial planners' Puget Sound group.

Tilley offers these tips:

  • You may need to borrow money or tap into retirement funds to buy a franchise, so consider how much income you'll want, how much you can afford to pay for the franchise and operational fees, and how much you can afford to lose.
  • Pick the franchise that's right for you. Typically, you'll work 12 hours a day, seven days a week getting up and running. "It's essential to pick something you enjoy," Tilley says.
  • Questions to ask in picking a franchise: Is there a demand for its service or product? How strong is the competition? Is the franchise a fad or something long-lasting? Have complaints against it been lodged with the Better Business Bureau?
  • "Resists high-pressure tactics," counsels Tilley. "Salespeople promote franchises at expositions and seminars around the country. Don't rely on oral promises and claims of fact." Demand to see a franchiser's Uniform Franchise Offering Circular, which should include vital financial information -- fees and royalties -- and information on trademarks, operating restrictions, termination, training, advertising, past litigation and bankruptcy proceedings, and the franchiser's financial condition.
  • "Talk with current and former franchise owners," Tilley urges. Franchisers must give you names of at least 100 current franchise owners.
  • Obtain a copy of the Federal Trade Commission's booklet on franchises.
  • Have an attorney and accountant review your franchise contract.
    • "Learn everything there is to know about the franchise you are interested in before you buy," Tilley says. "It is always better to be safe than sorry."