Franchises - 3/19/09

Kim: As more and more people lose their jobs some think of possibly starting their own business and being their own boss. But starting your own business can be tough. Many people look to become a franchisee as an easy way to start their own business. Here to discuss the legal issues in buying a franchise is attorney Michael Solomon.

Kim: Franchises are a big business. Over 41% of retail sales are spent at franchises. There seems to be franchises for everything , food, clothing, home health care , even cleaning services. Mike , how much does a franchise typically cost?

Mike: Kim that varies all over the lot. Most franchises have an upfront one time charge that can be as little as $5-10,000 to well over $100,000 plus some percentage of future sales. Additionally, you may need to put up a significant amount of capital to start the franchise depending on the type of franchise. For example McDonalds's requires a minimum of $300,000 of personal funds to start your franchise. The rest can be borrowed.

Kim : What should you do to start looking for a franchise?

Mike Here are the steps you should take:

1. Initial Research- research on the web or go to a franchise exposition and see what is out there. Some people go to a franchise broker to help them find a franchise. Be careful. Most are honest but some just look to push you into a franchise to get a commission or are even paid by the franchisor and work for the franchisor not you.

2. Franchise Disclosure Document- before you sign on the dotted line you have a right to review the Franchise Disclosure Document. It is important to read it . This document can be over100 pages long and is required by the Federal Trade Commission. The information includes :

  • Costs of starting and operating franchise
  • Information of current and former franchisees in your area
  • Financial information on the franchisor

3. Review by attorney and accountant- Your about to enter into a substantial business relationship with complicated documents. You need to have your attorney and accountant involved.

You can find other information about franchises on the FTC web site.

Kim: this sounds like a lot of work. What about all of those ads for businesses for little money down and a few hours of work making you thousands of extra dollars a week

Mike: Kim , run away as fast as you can. Many of those business opportunities like vending machines, medical billing or stuffing envelopes for $4 per envelope are frauds. Lets face it if you are going to make money in any business, it means long hours and hard work and some investment of money. There is no easy way to be successful.

Kim: Mike thanks for that information. Hopefully our viewers will listen and be cautious and do their research before buying a franchise.