The SBA reported that 30% of small stand-alone businesses fail, while less than 5% of franchises fail. The reasons for franchises failing could be for many different reasons. It usually happens in the early phase. Here are some reasons for this happening.

The idea of your franchise may not be accepted in a community. For example, hamburgers are a widely accepted food in America; however, not all hamburger joints know how to make their business appealing.

If the franchise is not located in a good place, it will most likely fail. You don’t want to be inconveniently located or in an isolated area.

If you have poor marketing or advertising, your franchise may fail. Some franchisees have to put a certain amount of money into a pot for national advertising. Some franchises advertise through campaigns. Some advertise on a local scale. Depending on the franchise you choose, you may need to do the leg work yourself. If you do not have a lot of skills in sales, I would think about buying a different franchise.

Another reason for failure is because franchisees have unrealistic expectations. Be prepared to not make a profit for 2-3 years.

Last but not least, if you are not a people person and you can’t take charge and manage a group of people, you will probably fail at franchising.

So, you have decided you want to buy a franchise, but where do you start? The process can be overwhelming. Here are some easy steps to take.

First and foremost, you want to know where you stand. You want to know your interests, background in the business industry, your skills, as well as your financial position. What is your budget? What is your net worth? How much money are you willing to lose? Do you like people? Can you lead others? If you ask yourself these questions it will be easier to narrow down your search for a franchise by staying in a range you can afford and will be good at.

Second, you will need to research franchise opportunities. There are thousands of franchise websites so it may be overwhelming to look at them and may be a lengthy process. When searching, consider your target area is and what is needed in the area. If it oversaturated with McDonalds, I probably wouldn’t go with a McDonalds. You need to meet the needs of your target area. This will narrow down your search.

Once you have chosen the franchise you want to invest in, you will most likely need financing. There are many ways to go about this. You may get a loan through a bank. You may get financing through the SBA guaranteed loans or a home equity loan. If you are entering a home-based business you may not even need financing because they are comparatively inexpensive.

Fourth, if your franchise is a store you may need to build it from the ground up or you may lease a building and have to outfit it. You will need furniture, décor, signage and equipment to do so. You will want to find out how long this is going to take to make sure you can have the date of the grand opening planned out.

Fifth, you will need to go through training that the franchisor provides to make sure you can effectively run the business. You will also get an operating manual.

Last but not least, you may need to hire staff, depending on what kind of business you have. Before your franchise opens, you will want to advertise that you are hiring. Make sure to do reference checks before you hire anyone.

If you take these one by one, you’ll totally get through this crazy process.

Good Luck!

Investing in a franchise is a huge life changing decision. When going into this huge of an investment you should take every precaution. Here are some warning signs.

If the sales person is pushing you to sign, back off. If you feel a ton of pressure to sign when you’re not ready then don’t do it. A good franchisor makes sure the fit is right first and doesn’t force someone into it.

If the salesperson’s information is different from what the UFOC says, get what they say in writing. For example, if the franchise agreement states you’re going have to pay $1,000 a month for advertising but the salesperson is telling you $500, get it in writing. They are only responsible for what is in writing.

If the franchisor isn’t following through, this is a bad sign. Some franchisors put franchisees through little tests to see how they’ll respond. The same goes for franchisors. If they do not get back to you in a timely manner and doesn’t keep their word during the application process, how is it going to be when you are legally binded to them?

A history of litigation is something to look out for. Litigation isn’t always a bad thing in a franchise system. A good franchisor will use litigation to protect the brand when needed. Also, some franchisees are just looking at the shortcomings of the franchisor and take them to court. Excessive litigation can be bad, you just need to dig a little deeper to understand what is going on.

You will want to check out the amount of training and support provided. Will you feel prepared to carry out the duties of the franchise with the amount of training and support provided? If you are not confident you will learn everything you need to know, dig deeper. Ask franchisees if they felt it was an adequate amount. The support a long the way is important as well. Do you feel like you will have a good support system? If these things are weak you may want to rethink whether or not you want to be in that franchise.

Another thing you will want to check out is if the franchisor is financially stable. If you are not experienced in reviewing financial statements, I would get a professional to help you look over the UFOC to understand their financial stance. If the company does not have enough money to provide you with the support you need, I would rethink if you want to be apart of that franchise. In the end you will probably be the loser of the deal.

One or two of these warnings signs may not be too big of a deal if the franchisor has an explanation, however, if there are three or more I would definitely rethink where you invest your money.

There are quite a few payments that franchisees must pay. There are on-time and ongoing payments. The FDC requires franchisors to list the fees that are required of the franchisee. These fees are usually located in the UFOC.

First, you will pay the initial franchise fee. This fee is required for a franchisee to have the rights to use the franchise trademark and sell its products and/or services. The franchisor has established a system that has been proved to work in the past and brand awareness. In return, the franchisors request a franchise fee, which can be under $10,000 or up to $100,000.

Legal and accounting fees are also required. An accountant helps look over the franchisor’s financial statements and evaluates if they are financially stable. An attorney looks over your franchise agreement and creates a corporation, LLC, or legal entity for your franchise, if needed.

As a franchisee you will also need to pay for insurance. There are a few types of insurance you’ll probably need. You’ll need property, liability, and may need to provide health insurance for your employees. The franchisor will have specific requirements. I would make a copy of the requirements and fax it to the insurance company to make sure that you get every requirement and get a quote.

Employee’s salary is another payment you have to think about. In the first two years of franchising, you may not make a profit. So, you need to calculate the employee’s salary in your initial budget.

You will also need to factor in building/outfitting costs. This cost varies widely on the type of business you are running. If you have to build a store from the ground up, the costs are going to be much more. However, if you are outfitting a building that already exists they will be less. The things that come with these costs would be décor, lighting, ventilation, equipment, furniture, and so forth.

You will need to pay rent and security deposits. This money goes to your landlord if you lease your building.

You need to pay for equipment and software upgrades. The franchisors may require these upgrades.

You will also have to pay royalty fees. These are usually paid monthly by the franchisee to the franchisor. It is usually a percentage of the franchisee’s total sales. These fees are usually between 4% and 8% of the total sales.

Most franchisors require that the franchisee pays advertising fees. The fees go to the advertising fund which pays for national and/or local ad campaigns, commercials, and other promotions. Other franchisors may have co-op programs where the franchisor will pay a portion of the advertising and the franchisee will pay the rest.

Those are the fees. It may seem overwhelming but just take them one at a time.

The Franchise Agreement is a legal document that governs the franchisee/franchisor relationship. There is no specific format to go by for a franchise agreement because each franchise varies. In general, here are the 10 things that are covered in the franchise agreement.

First, training and support provided by the franchisor is talked about in the franchise agreement. Each franchisor has their own training program for their franchisees and sometimes offers support throughout their time as a franchisee. The franchise agreement will tell you what kind of training the franchisor will provide as well as whether or not they will provide ongoing support.

Second, the franchise agreement will also let you know what territory you will operate and whether or not you will have exclusivity rights.

Third, the agreement will tell you how long the agreement lasts.

Fourth, the agreement will tell you how much the franchise fee is, which gives you the right to the franchisor’s trademark and operating system.

Fifth, the franchise agreement also tells you how you can use the franchise trademark, patent, and signage.

Sixth, the agreement will also tell you the rest of the fees you are expected to pay. Most franchisors require franchisees to pay a royalty fee which is usually 4-8 percent of the total sales, usually monthly.

Seventh, it will include information on advertising. The agreement will let you know what fees you have to pay toward advertising and how much advertising the franchisor will provide.

Eighth, the agreement tells you how franchisees are supposed to run their outlet.

Ninth, the franchise agreement tells you what renewal rights you have and franchisee termination/cancellation policies. Some franchisors put an Arbitration Clause in the agreement which states that if legal action is warranted on either side, that an arbitrator will view the case instead of going to court.

Tenth, the agreement also states your resale rights. Some franchisors let franchisees sell their franchise for whatever reason. However, some refuse the right for franchisees to resell the franchise, which allows the franchisor to buy it back for their own set price or may match the first potential buyer’s price.

That is the gist of a franchise agreement. Hope this is helpful.

Have you always wanted to own a franchise but are intimidated of the legal work that is entailed to start up a location from scratch? If this is the case you can buy a franchise that is already existent. There are some negatives and positives to buying an existing franchise location.

The major benefit of taking over an existing franchise is that it is already in operation. This means you do not have to go out and look for real estate, most employees stay so you don’t have to go through the hiring process. Another plus that it is already in operation is that vendors will already have their delivery schedules worked out and you will have well established customer base.

Another benefit in taking over an existing franchise is that you have a realistic shot of the profitability of the franchise. If you think that buying an existing franchise will be good because it will be booming immediately, you’re wrong. A lot of franchisees have to sell their franchise because they did not make as much profit as they were intending. You will have access to all their monetary records and earnings history to see if it is wise to enter that franchise. If the numbers look solid, than go for it; however, if the numbers don’t seem too good, walk away now.

Another benefit is that you won’t have to pay certain fees. To make sure of this, you’ll have to closely inspect the franchise agreement you are entering into. In most cases, you will enter the existing franchise agreement. Make sure that you don’t mistake the franchise agreement that new franchisees would enter into. The benefit in keeping the old agreement is that the fees may be lower than what they are in the new franchise agreement. However, you will probably have to pay a transfer fee instead of the new franchise fee.

Before entering an existing franchise, here are some things to think about or investigate.

Find out why the franchisee is leaving. They may be leaving because of a poor relationship with the franchisor. You wouldn’t want to enter into that same kind of relationship.

Investigate the demographics of the city that the franchise in. Are there major changes happening in the community that may affect the well being of your franchise? Look up the market trends and predictions.

Another thing to take into consideration is that the current franchisee will probably be determining the purchase price or the two of you may determine it together. Remember though that there is a time bracket where the franchisor has the right to buy it back before it is up for public sale. So find out how long that time bracket stays open.

Are you trying to get a franchise off the ground? Do you need help financially? You first choice may be asking a family member for money. There are negatives and positives in asking a family member for financial help. Asking for money is definitely a tough question to ask family and doesn’t always go over well.

Before you ask a family member for money you may want to think it through. Here are some things to think about.

Before talking to a family member you want to get your agreement in writing. Just like going to an institution, you want to be as professional as possible by having all the details to lay out for them. Your family member should be in complete agreement of your written documents.

You want to look for family members that will be lenders rather than investors. When you sign off a loan agreement with a family member, the only thing you are required to do is pay the money back with interest. However, when a family member wants to invest, there is much caution that needs to be taken. This can cause a lot of tension in families.

When asking a family member to sign a loan agreement, don’t underestimate the power of money. Money causes a lot of heartache in families. To avoid this, make sure that you family member understands the agreement that he or she is about to sign.

Once you get a family member to sign make sure to pay the loan as you go. All you have to do to make this happen is set a fixed percent of your franchise’s cash-flow to immediately give to your lending relative. This will be the fastest way to eliminate your debt and will keep you from stressing.

Last thing you should remember is to be completely honest with your family members. Do not let them think there is no way of you failing. Be blunt by letting them know all the risks involved with lending you money. Let them know that there may be a chance that they won’t get their money back.

So be careful getting into a loan agreement with family. Be prepared.