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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Franchises for Would-Be Entrepreneurs

Opening a new, independent business involves significant risk. For this reason, many entrepreneurs look to franchising as an alternative to starting from scratch. But not all franchises are created equal. The following advice from the New Jersey Society of Certified Public Accountants (NJSCPA) provides an overview of some of the things you should consider before investing in a franchise.

Determine Whether a Franchise is Right for You. Franchising has its advantages and disadvantages. A major advantage is that many franchises come with an established customer base as a result of brand recognition. In many cases, the franchisee also benefits by receiving help from the franchisor with site selection, training, store design, operating procedures and marketing materials.
On the down side, franchises can be expensive. And even though it's the franchisee's business, many must be operated according to detailed, strict guidelines. If you feel strongly about doing things your way, you might be better off in an independent business.

Read the Offering Circular. The Federal Trade Commission (FTC) requires franchisors to provide a comprehensive document called a "Uniform Franchise Offering Circular" (UFOC). It provides basic facts about the company, including the names and business background of the franchise's principals, its litigation history, finances, costs, restrictions, training and other assistance provided, as well as conditions for termination. Study this document carefully so that you are aware of what you are getting into.

Understand the Fee Structure. When you buy a franchise, your investment risk is reduced because you are joining an established company. But the franchise fee may be hefty. Be sure you understand what the fee covers. In some cases, all start-up costs are included, while others charge extra for training, marketing and other services. In addition, most franchisors charge royalties of three percent or more of revenues - regardless of how well or poorly your business is doing.

Know What Support You're Entitled To. How much training will you get? Will the franchisor help with ads, bookkeeping and personnel matters? What about supplies and equipment? Some franchises require you to buy almost everything needed from them. If so, you'll want to know if the costs are competitive with other sources.

Talk to Current and Former Franchisees. Speaking with current and former franchisees is probably the most reliable way to learn more about the company and franchise you're considering. Don't limit yourself to local franchise owners. These individuals may view you as a potential competitor and discourage you. Try to get a sense of their overall experience with the franchise. Find out things that went wrong and whether there were any unanticipated costs. And ask if they would invest in another outlet.

Visit the Home Office of the Franchisor. If possible, try to meet the franchise's key players - the principals and those who manage the training, accounting, operations and customer service functions. Determine whether they are the kind of people with whom you would be comfortable working.

Obtain Professional Advice. Hire an attorney experienced with franchising to review the offering and answer any questions you may have. Don't rely on the numbers the franchisor gives you. A CPA can provide valuable insight and advice concerning the financial strength of the company and the economics of the opportunity. If you don't have a CPA, you can easily locate one online using the NJSCPA Find-A-CPA service. Visit www.findacpa.org to locate a highly qualified professional who is right for you.

If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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