Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (12 page)
Many franchisees and franchising experts say there’s no better way to cap off your research than by spending time in a franchisee location to see what your life will be like. Buyers should spend at least one week working in a unit. This is the best way for the franchisor and franchisee to evaluate each other. Offer to work for free. If the franchisor doesn’t want you to, you should be skeptical about the investment.
When all your research is completed, the choice between two equally sound franchises often comes down to your gut instinct. That’s why talking to franchisees and visiting locations is so important in the selection process.
Proven PurchaseBuying a franchise can be a good way to lessen the risk of business ownership. Some entrepreneurs cut that risk still further by purchasing an existing franchise—one that is already up and running. Not only does an existing franchise have a customer base, but it also has a management system already in place and ongoing revenues. In short, it already has a foundation—something that is very attractive to a lot of entrepreneurs.
Finding existing franchisees who are willing to sell is simply a matter of asking the parent company what’s available. You can also check local classified ads, or visit Franchising.com, which lists thousands of businesses for sale.
Once you have found some likely candidates, the investigation process combines the same steps used in buying an existing business with those used in buying a franchise. (For a list of questions to ask before purchasing an existing business, refer to the checklist on page 44.) The good news, however, is that you’ll get far more detailed financial information than you would when assessing a franchise company. Where other potential franchisees just get vague suggestions of potential earnings, you’ll get hard facts.
Of course, there is a price to pay for all the advantages of buying an existing franchise: It is generally much more costly. In fact, the purchase price of an existing location can be two to four times more than what you would pay for a new franchise from the same company. Because you are investing more money, it is even more important to make sure you have audited financial statements and to review them with your CPA.
Once in a while, you’ll find a franchise that isn’t doing well. Perhaps the current owner isn’t good at marketing, isn’t putting forth enough effort or isn’t following the system correctly. In this case, you may be able to get the existing franchise for what it would cost to buy a new franchise—or even less. It’s crucial, however, to make sure the problem is something you can correct and that you’ll be able to get the location up to speed fast. After all, you’re going to have immediate overhead expenses—for employees, royalties and operating costs—so you need some immediate income as well.
Also be aware that even if a particular franchise location is thriving, it does not necessarily mean the parent company is equally successful. In fact, sometimes franchisees who know the parent company is in trouble will try to unload their franchises before the franchisor goes under. Carefully assess the franchisor’s strength, accessibility and the level of assistance they provide. Do not settle for anything less than you would when buying a new franchise.
Buying a Business OpportunityIf a franchise sounds too restrictive for you but the idea of coming up with your own business idea, systems and procedures sounds intimidating, there is a middle ground: business opportunities.
TIPPut yourself in the franchisor’s shoes. You want to deliver a FDD only to qualified candidates who appear serious about the investment because each copy costs several dollars to reproduce. Show you are serious about their program and are genuinely interested in the information in the FDD, and you increase your chance of receiving one early in the process.
A business opportunity, in the simplest terms, is a packaged business investment that allows the buyer to begin a business. (Technically, all franchises are business opportunities, but not all business opportunities are franchises.)
Unlike a franchise, however, the business opportunity seller typically exercises no control over the buyer’s business operations. In fact, in most business opportunity programs, there is no continuing relationship between the seller and the buyer after the sale is made.
Although business opportunities offer less support than franchises, this could be an advantage for you if you thrive on freedom. Typically, you will not be obligated to follow the strict specifications and detailed program that franchisees must follow. With most business opportunities, you would simply buy a set of equipment or materials, and then you can operate the business any way and under any name you want. There are no ongoing royalties in most cases, and no trademark rights are sold.
However, this same lack of long-term commitment is also a business opportunity’s chief disadvantage. Because there is no continuing relationship, the world of business opportunities does have its share of con artists who promise buyers instant success, then take their money and run. While increased regulation of business opportunities has dramatically lessened the likelihood of rip-offs, it is still important to investigate an opportunity thoroughly before you invest any money.
Legal MattersIn general, a business opportunity refers to one of a number of ways to get into business. These include the following:
•
Dealers/distributors
are individuals or businesses that purchase the right to sell ABC Corp.’s products but not the right to use ABC’s trade name. For example, an authorized dealer of Minolta products might have a Minolta sign in his window, but he can’t call his business Minolta. Often, the words “dealers” and “distributors” are used interchangeably, but there is a difference: A distributor may sell to several dealers, while a dealer usually sells direct to retailers or consumers.
•
Licensees
have the right to use the seller’s trade name and certain methods, equipment, technology or product lines. If Business Opportunity XYZ has a special technique for reglazing porcelain, for instance, it will teach you the method and sell you the supplies and machinery needed to open your own business. You can call your business XYZ, but you are an independent licensee.
•
Vending machines
are provided by the seller, who may also help you find locations for them. You restock your own machines and collect the money.
•
Cooperatives
allow an existing business to affiliate with a network of similar businesses, usually for advertising and promotional purposes.ON THE LEVELD
irect sales is a type of business opportunity that is very popular with people looking for part-time, flexible businesses. Some of the bestknown companies in America, including Avon, Mary Kay Cosmetics and Tupperware, fall under the direct-selling umbrella.Direct-selling programs feature a low upfront investment—usually only a few hundred dollars for the purchase of a product sample kit—and the opportunity to sell a product line directly to friends, family and other personal contacts. Most direct-selling programs also ask participants to recruit other sales representatives. These recruits constitute a rep’s “downline,” and their sales generate income for those above them in the program.Things get sticky when a direct sales network compensates participants primarily for recruiting others rather than for selling the company’s products or services. A direct-selling system in which most of the revenues come from recruitment may be considered an illegal pyramid scheme.Since direct-selling programs are usually exempt from business opportunity regulation and are not defined as franchises under state and federal franchise laws, you will need to do your own investigation before investing any money. For more information, check out the Direct Selling Association’s website at dsa.org.
•
Direct sales
(see “On the Level” above).
Legal definitions of business opportunities vary, since not all states regulate business opportunities. (The 26 that do are Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.) Even among these, different states have different definitions of what constitutes a business opportunity. According to franchise law counsel Joel R. Buckberg, an attorney in Nashville, Tennessee, most definitions contain the following:
• The investor enters into an oral or written agreement for the vendor—or someone recommended by the vendor—to sell goods or services to the investor that allow him or her to begin a business.TIPDon’t forget to ask about the franchise or business opportunity’s training program. Find out how long it is, where it takes place and the general subjects covered. Look for a well-organized plan that combines classroom time with field orientation.
• The purchase involves a certain amount of money. In 15 states and under FTC regulations, the minimum investment is $500; in the other 11 states, that figure drops to as little as $100.
• The seller makes any one of the following statements to the investor during the course of the sale:1. The seller or someone the seller recommends will assist in securing locations for display racks, vending devices, outlets or accounts;2. The seller will return the money and repurchase what is sold to or made by the investor if the investor is dissatisfied with the investment;3. The seller will buy any or all of the products assembled or produced by the buyer;4. The seller guarantees (or, in some states, implies) that the buyer will be able to generate revenues in excess of the amount of the investment paid to the seller; or5. The seller will provide a marketing plan or a sales plan for the buyer.
If a seller meets the definition of a business opportunity in states that regulate them, it generally means he or she must register the offering with the state authorities and deliver a disclosure document to prospective buyers at least ten business days before the sale is made. (For more information on states’ regulations, check with consumer protection agencies—often a part of the attorney general’s office—in your state.)
Checking It OutResearching a business is a more challenging task than investigating a franchise. And if the business opportunity you are considering does not provide buyers with a disclosure document, you get a lot less information, so you have to do a lot more legwork on your own.
Other books
The Coldest War by Ian Tregillis
Stalemate by Iris Johansen
Scrubs Forever! by Jamie McEwan
Splintered by Kelly Miller
Leah's Seduction: 3 (Gianni and Leah - Leah's Seduction) by Trent, Emily Jane
Illicit Desire: Outlawed Realm, Book 2 by Tina Donahua
Method 15 33 by Shannon Kirk
Bardo thodol: El libro tibetano de los muertos by Padmasambhava
Torn Away by Jennifer Brown
Rock Star by Adrian Chamberlain
