Many people dream of being an entrepreneur. By purchasing a franchise, you often can
sell goods and services that have instant name recognition and can obtain training and
ongoing support to help you succeed. But be cautious. Like any investment, purchasing a
franchise is not a guarantee of success.

To help you evaluate whether owning a franchise is right for you, the Federal Trade
Commission has prepared this booklet. It will help you understand your obligations as a
franchise owner, how to shop for franchise opportunities, and how to ask the right
questions before you invest.

A franchise typically enables you, the investor or "franchisee," to operate a
business. By paying a franchise fee, which may cost several thousand dollars, you are
given a format or system developed by the company ("franchisor"), the right to
use the franchisor's name for a limited time, and assistance. For example, the franchisor
may help you find a location for your outlet; provide initial training and an operating
manual; and advise you on management, marketing, or personnel. Some franchisors offer
ongoing support such as monthly newsletters, a toll free 800 telephone number for
technical assistance, and periodic workshops or seminars.

While buying a franchise may reduce your investment risk by enabling you to associate
with an established company, it can be costly. You also may be required to relinquish
significant control over your business, while taking on contractual obligations with the
franchisor.

Below is an outline of several components of a typical franchise system. Consider each
carefully.

The Cost

In exchange for obtaining the right to use the franchisor's name and its assistance, you
may pay some or all of the following fees.

• initial franchise fee and other expenses. Your initial franchise fee, which may
  be non-refundable, may cost several thousand to several hundred thousand dollars. You may
  also incur significant costs to rent, build, and equip an outlet and to purchase initial
  inventory. Other costs include operating licenses and insurance. You also may be required
  to pay a "grand opening" fee to the franchisor to promote your new outlet.
• continuing royalty payments. You may have to pay the franchisor royalties based
  on a percentage of your weekly or monthly gross income. You often must pay royalties even
  if your outlet has not earned significant income during that time. In addition, royalties
  usually are paid for the right to use the franchisor's name. So even if the franchisor
  fails to provide promised support services, you still may have to pay royalties for the
  duration of your franchise agreement.
• advertising fees. You may have to pay into an advertising fund. Some portion of
  the advertising fees may go for national advertising or to attract new franchise owners,
  but not to target your particular outlet.

Controls

To ensure uniformity, franchisors typically control how franchisees conduct business.
These controls may significantly restrict your ability to exercise your own business
judgment. The following are typical examples of such controls.

• site approval. Many franchisors pre-approve sites for outlets. This may
  increase the likelihood that your outlet will attract customers. The franchisor, however,
  may not approve the site you want.
• design or appearance standards. Franchisors may impose design or appearance
  standards to ensure customers receive the same quality of goods and services in each
  outlet. Some franchisors require periodic renovations or seasonal design changes.
  Complying with these standards may increase your costs.
• restrictions on goods and services offered for sale. Franchisors may restrict
  the goods and services offered for sale. For example, as a restaurant franchise owner, you
  may not be able to add to your menu popular items or delete items that are unpopular.
  Similarly, as an automobile transmission repair franchise owner, you might not be able to
  perform other types of automotive work, such as brake or electrical system repairs.
• restrictions on method of operation. Franchisors may require you to operate in
  a particular manner. The franchisor might require you to operate during certain hours, use
  only pre-approved signs, employee uniforms, and advertisements, or abide by certain
  accounting or bookkeeping procedures. These restrictions may impede you from operating
  your outlet as you deem best. The franchisor also may require you to purchase supplies
  only from an approved supplier, even if you can buy similar goods elsewhere at a lower
  cost.
• restrictions of sales area. Franchisors may limit your business to a specific
  territory. While these territorial restrictions may ensure that other franchisees will not
  compete with you for the same customers, they could impede your ability to open additional
  outlets or move to a more profitable location.

Terminations and Renewal

You can lose the right to your franchise if you breach the franchise contract. In
addition, the franchise contract is for a limited time; there is no guarantee that you
will be able to renew it.

• franchise terminations. A franchisor can end your franchise agreement if, for
  example, you fail to pay royalties or abide by performance standards and sales
  restrictions. If your franchise is terminated, you may lose your investment.
• renewals. Franchise agreements typically run for 15 to 20 years. After that
  time, the franchisor may decline to renew your contract. Also be aware that renewals need
  not provide the original terms and conditions. The franchisor may raise the royalty
  payments, or impose new design standards and sales restrictions. Your previous territory
  may be reduced, possibly resulting in more competition from company-owned outlets or other
  franchisees.

Before investing in a particular franchise system, carefully consider how much money
you have to invest, your abilities, and your goals. The following checklist may help you
make your decision.

Your Investment

• How much money do you have to invest?
• How much money can you afford to lose?
• Will you purchase the franchise by yourself or with partners?
• Will you need financing and, if so, where can you obtain it?
• Do you have a favorable credit rating?
• Do you have savings or additional income to live on while starting your franchise?

Your Abilities

• Does the franchise require technical experience or relevant education, such as auto
  repair, home and office decorating, or tax preparation?
• What skills do you have? Do you have computer, bookkeeping, or other technical skills?
• What specialized knowledge or talents can you bring to a business?
• Have you ever owned or managed a business?

Your Goals

• What are your goals?
• Do you require a specific level of annual income?
• Are you interested in pursuing a particular field?
• Are you interested in retail sales or performing a service?
• How many hours are you willing to work?
• Do you want to operate the business yourself or hire a manager?
• Will franchise ownership be your primary source of income or will it supplement your
  current income?
• Would you be happy operating the business for the next 20 years?
• Would you like to own several outlets or only one?