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Home Based Franchise FAQ
Resource Center :: Home-Franchise Frequently Asked Questions
Home Based Franchise Frequently Asked Questions
What is franchising?
Franchising is a way of distributing products or services that involves a legal agreement between the owner of a trademark or trade name and an individual or a group that wants to use that trademark or trade name in a business. The agreement between the two parties outlines how business will be conducted. The party who lends its business system or trade name becomes the Franchisor, while the party who buys the right to use the system or trade name becomes the Franchisee.
How does the Franchisor make money?
There is usually a flat fee called a Franchise Fee that is paid initially by the Franchisee to have the right to use the Franchisor's trade name and business system. Also, the contract between the parties often outlines a royalty fee which must be paid to the Franchisor. This fee is an ongoing payment that is a percentage of the revenue earned by the Franchisee.
Why buy a franchise instead of going into business for myself?
With a proven business model and a recognized trade name, the rate of success of new franchises is significantly higher than that of independent start-up businesses. Other benefits include group purchasing power, professional marketing support, financial assistance, consistency for consumers, and on-going support and advice from the Franchisor.
What do I need to know before buying a franchise?
Buying a franchise has risks just like any new business, and it's important to research the franchise thoroughly before purchasing. It's also important to know your own goals and skills to find a good match for yourself.
A.) When researching franchises, consider:
- Is there a demand for the products or services of a particular Franchisor in the area where you want to start your home business? Will the demand remain steady year-round?
- Does the product or service have long-lasting appeal and growth into the future?
- What is the level of competition? How many similar franchises are already in your area?
- How widely recognized is the name or trademark? How long has the franchise been around and does it have a reputation for quality goods or services?
- What support services will be available to me as a Franchisee?
- What fees will I be required to pay, initially and ongoing?
- How long has the Franchisor been managing a franchise system? What successes/failures has the franchise system experienced?
B.) Regarding yourself, consider:
- Do I have the level of experience required to own and operate the business? Or do I have the motivation to learn the franchised business through training provided by the Franchisor?
- What hours and what type of personal commitment will be required of me in order to run the business?
- Will I be happy running this business in 5, 10, or 20 years? That may be the duration of the contract required by the Franshisor.
- Does the franchise opportunity's business model fit my long and short term goals and my financial capacity?
C.) Information to keep in mind before making a commitment to a Franchisor:
- Study the Franchisor's Disclosure Document - Their UFOC (Uniform Franchise Offering Circular). This document is full of valuable information about the Franchisor. It is important to read it thoroughly to understand the details of their home based franchise and to make sure the relationship they are proposing is one that meets your needs and aligns with your goals and dreams. This is a good time to work with an accountant to review the financial disclosures, and with a franchise attorney to review the contract.
- Get Substantiations for Any Earnings Claims (the amount of money a Franchisor may say you can earn through their franchise). The Federal Trade Commission requires Franchisors that offer an earnings claim to provide written evidence to support their claim. Make sure to review this information thoroughly so you have clear expectations.
What is the UFOC, or Disclosure Document?
The Uniform Franchise Offering Circular (UFOC) is a legally required document that a Franchisor must give to the person/party considering purchasing a franchise at least 10 days prior to any singing of contracts. It contains extensive information about the franchise, such as:
- Past experiences and history of the franchise and franchise executives.
- Names, addresses and telephone numbers of other Franchisees (both current and former).
- The responsibilities of both the Franchisee and the Franchisor once under contract.
- Any litigation history.
- Financial statement (fully audited).
- The cost and fees required to start and upkeep the business.
- For a detailed outline the UFOC, please click here.
How do I know if I qualify financially?
Very soon after contacting a Franchisor, you will be told about their financial requirements. Carefully compile your financial data. Then you and the Franchisor will be able to determine your qualification and what you will need to purchase the home-business franchise opportunity.
Where can I get financing?
There are many resources for financial capital. The Franchisor itself may provide a financing plan. Banks and other lending institutions are often open to lending to Franchisees. The Small Business Association has many loan opportunities. Friends and family are another source (just be sure to communicate terms very clearly). You may find someone who is interested as a partner who has the capital needed. Remember, 'where there is a will, there is a way'.
How long does it take to start up a franchise?
This will vary a good deal depending on the type of business. Often, home based businesses fall into place more quickly because the location/base-of-operations is pre-determined - it's your home. There is no need to negotiate leases, real estate deals or lengthy construction projects. The duration of required training and organizing finances are other variables. Generally, home-business franchise opportunities take from 6 to 18 months to get underway. It's a good idea to prepare yourself with one to two years living expenses when creating your financial plan and home business vision.
How do I know if I'll be successful?
It is critical while on the path of researching home based franchises, to also research yourself. Become familiar with your own goals and ideals, and be honest about your skills and experiences. Determine what you really want out of life, and what you are willing to sacrifice in order to achieve it. Find out if the industry you're interested in is a good match for you and your lifestyle by asking yourself these questions:
- Am I qualified for this field by experience or education?
- Will I learn the skills I will need quickly?
- Can I afford the initial investment?
Take time to imagine your life as a home business owner:
- What hours will I work?
- How will this affect my family?
- Do I have the self-motivation and discipline to work each day and grow my new home-based business opportunity?
Reflecting on these questions will help you evaluate your chances for a success. Remember, no business venture is guaranteed - even with your best efforts. As you consider whether or not to purchase a home-based franchise, remember that ancient wisdom "The journey is the destination". If you focus on doing your best at every step along the way, the process will be rewarding and fulfilling no matter what the outcome.
How do I find a lawyer specializing in Franchise Law?
It's a very good idea to work with a lawyer while plowing through thick documents such as the UFOC. To find a lawyer who specializes in franchise law, simply contact:
The American Bar Association Service Center
750 North Lake Shore Dr.
Chicago, IL 60611
(312) 988-5522
Request the Membership Directory of the Forum Committee on Franchising, which lists the contact information of attorneys who are members of the Committee.
What do I need to know before going to a franchise exposition or convention?
A.) The basics:
- Going to a franchise exposition is a great way of seeing and comparing franchise opportunities that will enable you to work at home. Be aware that the goal of many representatives is to sell their franchise systems. Before you go, do your research. Know what type of franchises will fit your interests, goals, and finances.
- Don't be afraid to ask LOTS of questions. And talk to as many Franchisors as you can. It will be a special opportunity to speak directly with a wide range of franchises that offer home-business opportunities. Get as much information as you can, and then give yourself ample time afterward to digest everything you learned.
B.) Information to know about yourself before going to an exposition or convention:
- Know what type of business is a good match for your skills and goals. Look at your short and long term goals, as well as your skills, experience, and general interest. Review the different types of home based business industries and investigate those that spark your interest.
- Know your financial capacity. Look at your finances and figure out a realistic amount you will feel comfortable investing. It is a good idea to determine this before hand so that you do not waste your time researching an home-business opportunity that will not work for you.
C.) Information to keep in mind while you are at an exposition or convention:
- Write It Down. There can be an overwhelming amount of information presented to you at a franchise exposition. Take a moment to write down notes about franchise exhibits that interest you, and get cards from representatives so you can contact them later. Consider bringing a camera, voice recorder, video recorder, palm pilot or PDA (are these the same thing?) to make recording information quicker and easier.
- Shop Around. Visit several franchise exhibitors from industries that appeal to you. Ask questions about the history of the franchise, the franchise fees, royalty payments, available trainings and assistance, and what controls or restrictions the franchisor has in place. It is perfectly acceptable to walk away from any exhibit that does not meet your needs. And it is better to ask too many questions than too few.
How can I learn more about a particular franchise or home business opportunity?
There are a vast number of resources available beyond our own Resource Center at Home Business Frontiers. Here are other suggestions:
- Because many home based franchise opportunities require a substantial investment, it would be valuable to hire a lawyer and/or an accountant to make sure you understand the contract, finances, and the disclosure document (the UFOC). The resource for finding a lawyer is listed above.
- Banks and other lending institutions can help to provide an unbiased view of a particular franchise.
- The Better Business Bureau can provide you with information about any consumer complaints on the franchise company's products, services or staff.
- The Small Business Administration has excellent resources on starting a home business, creating business plans, and researching franchises.
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