The Franchising Route to Starting a Business

Many a franchise, including Wendy’s, White Castle, and Max & Erma’s, got their start here in Columbus, Ohio where I practice business and commercial law.  So it is really not very surprising that budding entreprenuers in Central Ohio, as elsewhere, often consider a franchise opportunity when looking to start a business.

Concept and Information Availability.  Basically, the concept behind a franchise relationship is that in exchange for fees which can run into the several thousands of dollars, the franchisee new business owner receives the benefit of a proven business system and the associated experience.  And franchising may well be the way to go.  Franchisors often will provide resources and experience not otherwise available to a new business owner.  However, there will also be some loss of autonomy when it comes to how you run the business from day to day.

For better or worse, there is no shortage of information available regarding franchising.  (Interestingly, franchising is also apparently extremely popular in the Phillippines based on the results I got from the Google search I just did.)  But how do you know which information is reliable and correct?  How can you determine which franchise opportunity, if any, is right for you?

Begin by Assessing Personal Strengths and Weaknesses.  You should begin by taking a close look at yourself and weigh your strengths and weaknesses.  For example, are you a “team player”?  Because a franchise relationship is all about following someone else’s system, you need to be able to picture yourself in that role.  Do you have particular knowledge about certain industries?  The Small Business Administration offers a helpful  “Is Franchising Right for Me?” workbook to help make this assessment.

Understand General Franchising Fundamentals.  Next you should make sure you understand at least the fundamentals of how franchising works.  Here again the SBA website excels in providing useful information on franchising and how to proceed if you are interested in this means of starting a business.  Entrepenuer.com’s “Franchise Basics”  and “Franchise Terminology” posts also provide useful information about franchising, its terminology, and some of the details to which you should pay attention; other posts cover other questions on franchising. 

In addition, Mike Hamblin of the Michigan Business Lawyer Blog has written a four-part series on “Could a Franchise Be a Viable Opportunity for a Michigan Entreprenuer?” which provides a good overview of franchising, whatever state you live in:

• Part 1 - General Overview of Franchises (explaining the types of franchises available
• Part 2 - What Constitutes a Franchise? 
• Part 3 - Franchisors’ Federal Disclosure Obligations [under the Uniform Franchise Operating Circular - more on that later]
• Part 4 - Franchisors’ State Law Disclosure Obligations (Note that although Ohio Rev. Code 1334.02 does require certain disclosures with respect to “Business Opportunity Plans”, these are not applicable to franchise opportunities offered in Ohio so long as they comply with federal disclosure requirements.)

Evaluate Specific Franchise Opportunities.  Once you understand the basic idea behind franchising and how it works in general, you are ready to start focusing more specifically on particular franchise opportunities.  How should you go about evaluating what’s available?  What’s important to look at? 

• The Small Business Administration provides an excellent Consumer Guide to Buying a Franchise on its website which does a great job of highlighting important issues to consider.  

• Rush Nigut of the Rush on Business blog (Congratulations Rush on your new position at Central Iowa-based Brick Gentry, P.C.) frequently posts on franchising.  He offers posts on “Fundamentals of Franchising - Franchisee’s Perspective” and “Franchises: Four Things to Make You Go ‘Hmm” which address certain “red flags” you should watch for and be wary of, as well as many other fine posts on the subject.

• The American Franchisee Association warns about “The Twelve Worst Franchise Agreement Provisions” you should avoid at all costs and also discusses “The Problems Franchisees Face” of which you should be aware.

There are also several good sources of information about particular franchise opportunities:

• Rush Nigut offers some suggestions in his “Looking for a Franchise?  Be Sure to Pick the Right Resources” post on the Rush on Business blog.

• The Franchise Law Blog published by the attorneys at Connecticut-based Wiggin & Dana LLP provides frequent news items about particular franchises that could be helpful in evaluating the viability of specific franchises.

• The Franchise King blog, published by self-described “Northeast Ohio’s franchise guru” Joel Libava, is a bit more glitzy, but also offers information about specific franchises and going about evaluating them, as well as numerous links to other sources of information.  (This one took a little while to load on my home computer the first time I visited so you may need to be patient.)  

Read - Carefully - the Disclosure Documentation the Franchisor is Required by Law to Give You.  When you have narrowed the choice down to a couple of franchise opportunity possibilities, it’s time to review (if you have not already done so) the disclosure documents provided by the franchisor as required by federal law.  Until recently, these disclosures were contained in a document called a Uniform Franchise Offering Circular.  Now being phased in and becoming mandatory after July 1, 2008, these disclosures will instead appear in a Franchise Disclosure Document.  The disclosures required will remain largely the same, but some additional information will be provided in a franchisor’s Franchise Disclosure Document.

• Rush Nigut of the Rush on Business blog provides a relatively concise overview highlighting “Key Differences Between UFOC and New Franchise Disclosure Document”.

• Take the time to listen to  ”A Close Look at Pitfalls in the Franchise Disclosure Document” podcast.  This podcast features about a half hour interview of franchisor attorney Warren Lewis and franchisee attorney Julie Lusthaus and does a great job of presenting both perspectives.  It also does a tremendous job of explaining how the new Franchise Disclosure Document will differ from the UFOC, as well as the importance and usefulness of the various disclosures required - all in easily understandable language.  This is an excellent resource for anyone considering entering into a franchise relationship and is well worth the time to hear.   

• For those wanting a more technical discussion of disclosure requirements, visit the Federal Trade Commission’s website.   

In many cases, entering a franchise relationship is a good option for someone wanting to start a new business, but apprehensive of possible consequences stemming from inexperience.  It can also be a way to jump start the path to profitability if you choose the right franchise.  However, it is extremely important to do extensive “due diligence” research to be sure you are making a good choice.