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How To Choose a Franchise
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Article 6: Cautions And Red Flags
Some franchising hype promises you can “be your own boss” and “own your own business.” Reality is a bit different.
American Association of Franchisees & Dealers Chairman Robert L. Purvin, Jr., author of “The Franchise Fraud,” cautions that franchises can be misrepresented as a “safe and secure way to own your own business.”
“It’s rarely safe and secure, and it’s rarely business ownership,” Purvin says. “In fact, more and more, when you read the agreement, it grants a license to operate [the franchisor’s] business for 20 years. You are really a sharecropper … you get the right to run it for them. And then it reverts to them.”
Temper enthusiasm with reality checks. Franchising isn’t a guaranteed success.
There is also debate over whether franchise ownership offers a better chance at success than starting your own independent business. Some say yes.
But a 1996 study, “Survival Patterns Among Franchise and Nonfranchise Firms” by Dr. Timothy Bates from Wayne State University, Detroit, Mich., found that although young non-corporate franchise firms showed some strengths, they were dramatically less profitable than young independent small firms of the same age. Moreover, franchises had a lower survival rate: 61.9 percent compared with 68.1 percent for non-franchised firms.
So before getting into a franchise, consider how you will get out of it. If you decide to sell the franchise, do you get anything for your goodwill or do you own only the use of the name? Does a new buyer get to take over your contract or must he negotiate a new one with the franchisor?
“It’s not something that you walk away from easily. You better get a good fit, and … don’t do this on any kind of faith and trust,” says Ron Bruno, owner of Franchise Advocates Consulting Group.
Bruno’s advice: “Don’t quit your job yet. It may take a long time before you make any money.”
Purvin’s advice: “Seize upon something you will enjoy, but also make sure there’s an escape if you don’t.”
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