Perhaps you want to own your own business because you want to be your own boss.

Should you start a business from scratch? Should you buy an existing business from owners who are seeking to sell so they can retire? Or, should you buy a franchise? When you buy a franchise, are you still your own boss? Are other franchise owners your competi tion or associates? Do you need special skills to operate a franchise? Now, we'll go over the ins and outs of business franchising to help you decide i f it's right for you. What is Franchising? Imagine that you're opening your own McDonald's. To do this, you have to buy a M cDonald's franchise. In order to qualify for a conventional franchise, you have to have $175,000 (not borrowed). Your total costs to open the restaurant, however, will be anywhere from $430,000 to $750,000, which goes to paying for the building, eq uipment, etc. Forty percent of this cost has to be from your own (non-borrowed) funds. You'll pay an initial franchise fee of $45,000 directly to McDonald's. The other costs go to suppliers, so this is the only upfront fee you pay to McDonald's. T hen, you'll go through a rigorous nine-month training period where you'll learn about the McDon ald's way of doing things -- things like their standards for quality, service, v alue, formulas and specifications for menu items, their method of operation, and inventory cont rol techniques. You'll have to agree to operate the restaurant from a single loc ation, usually for 20 years, following their guidelines for decor, signage, layout and everythi ng else that makes McDonald's McDonald's. Once you've completed training and are ready to go, McDonalds will offer you a l ocation they've already developed. The exterior of the building will be complete , but you will have to take care of interior additions such as kitchen equipment, seating and landscaping. You'll get constant support from a McDonald's Field Consultant, who can advise you on details and will visit regularly. You'll pay McDonald's a monthly fee of 4 percent of your sales, and either a flat base rent or a percentage rent of at least 8.5 percent of your sales. How much money you make depends on many things, including the location and its popularity, the efficiency of your operating costs, and yo ur ability to manage and control the business. Think of franchising as paying someone for his or her business strategy, marketi ng strategy, operations strategy, and the use of his or her name. That's pretty much what franchising is -- you are establishing a relationship with a successfu l business so you can use its systems and capitalize on its existing brand aware ness in order to get a quicker return on your own investment. You are using its proven system and name, and running it by its rules. Are you still your own boss? In some respects, no. You still have to answer to s omeone else and follow his or her direction. You don't really own the business; you own the assets you've purchased in order to establish the business. According to the article "What is Franchising" by Robert Gappa, on the Franchise UPDATE Web site, there are over 2,500 franchise systems in the United States wi

th over 534,000 units. This comes out to about 3.2 percent of all businesses, and 3 5 percent of all retail and service revenue in the United States. Advantages of Franchising The biggest advantage of franchising appears to be the reduction of risk you wil l be taking for your investment. This is because franchises typically get up and running faster, and are profitable more quickly. This can be a result of better management as well as a well-known name. According to the Small Business Admini stration (SBA), most small businesses fail because of weak management. It is in this area that the franchising option shines the most. When you lease a franchis e, you are leasing that managerial know-how. You also usually get better deals on supplies because the franchise company can purchase goods and supplies in bulk for the entire chain, and then pass that sav ings on to you and the other franchise units. The often instant recognition from customers is also a big plus. Customers are d ealing with a "known" rather than an "unknown." Think about it: If you are drivi ng through a town you've never visited before and have the choice of a "Billy Bo b's Fried Chicken" or a "Kentucky Fried Chicken," which one are you more likely to stop at? Until you know that Billy Bob's is THE place for fried chicken, you may not want to take the chance. For the customer, the advantages of a franchise include the comfort of knowing w hat you're getting. You know that the quality of the product or service at one l ocation will be comparable to that of another location. You know what they have and you already know what you like about it. The questions for you as a potentia l franchisee are: Are you looking for something that is uniquely yours? Or do yo u simply want to run the show, regardless if it's by someone else's rules? Before you answer those questions, let's go into a little more detail about how the franchise actually works. The Rules There are two groups involved in a franchise, the franchisor (the person or comp any leasing the rights to the business name and system) and the franchisee (the person who purchases it). The right to the franchise is sold by the franchisor to the franchisee for an in itial sum of money, often called the up-front entry fee, or franchise fee. This money will be paid once the contract has been signed. The contract (franchise ag reement) details the responsibilities of both the franchisor and the franchisee, and is usually for a specific length of time (typically several years). Once th e contract expires, it must be renewed. State laws often have an impact on the o ptions for this renewal. This initial franchise fee doesn't include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assista nce like site selection. It doesn't include any of the necessary inventory, fixt ures, furniture or real estate. In addition to the franchise fee, the franchisee must pay the franchisor royalty fees, or other on-going payments. These payments are usually taken as a percent age of sales, but can also be set up as a fixed amount or on a sliding scale. Th e terms of these fees will be spelled out in the franchise agreement. These paym ents are for the on-going services and support that the franchisor provides. Fra nchisors may also sell supplies directly to their franchisees. Advertising funds are also paid periodically. These funds are usually put into a

general account and used for national and regional promotion for the entire cha in. Restrictive Covenants The success of most franchises is based on the operating systems, methods, and p roducts produced. For this reason, franchisors must protect their proprietary in formation and trade marks. In order to do this, they establish restrictive coven ants for their franchisees. These covenants govern the things a franchisee can d o. For example, one restrictive covenant may state that the franchisee cannot opera te another similar business that would compete with the franchised business duri ng the term of the franchise agreement. These are called in-term non-competition covenants. There may also be post-term non-competition covenants that prohibit the franchisee from operating a similar business even after the terms of the fra nchise have expired. Each state, however, has its own laws regarding the enforce ment of non-competition covenants. Often, in-term covenants can be more readily enforced than post-term covenants. Trade Secrets A business's trade secrets are often vital to its success. It is an understood r ule that franchisees will keep trade secrets strictly confidential. This is not only protects the franchise, but it also protects the franchisee's individual in vestment. Most states have adopted some version of the Uniform Trade Secrets Act, which he lps identify the parts of the franchise system that may constitute a trade secre t. To see a list of those states that have adopted it, click here. Proprietary s ystems and franchise information that doesn't fall under the category of a "trad e secret" should be treated as such regardless, because it may still be protecte d under the restrictive covenants of the franchise agreement. Selecting the Right Franchise How do you select the business franchise that fits your needs, skills and desire s best, while also making sure you're joining a top-notch organization? There ar e some steps to take to begin the weeding-out process. So put on your inspector' s hat and begin formulating a game plan. First of all, think about the work environment you are interested in, and the re quirements that running businesses in various industries will have. For example, do you like working late (and long) hours, hiring and managing employees, and d ealing with the public? If so, you could consider the food service industry. Thi nk long and hard about what "fits" your lifestyle. Involve your family and any f riends or associates you may want to pull into the business. Write down your obj ectives. Sometimes, just the act of writing things down helps you more clearly i dentify what you really want. Once you have identified the general category of business you want enter into, v isit some of the franchising Web sites we have listed at the end of this article . On most of these sites, you can search for franchises based on investment leve ls, type of business, and sometimes geographic region. Some even give you estima ted breakdowns of what your total investments will be, as well as the ongoing ro yalty and advertising payments. You can also use a franchising consultant to hel p narrow down your choices. When you get a list put together, begin contacting the franchisors for additiona l information. One thing to keep in mind throughout this process is that while y ou're shopping for a franchise, those franchises are also out there shopping for franchisees. You'll be interrogated as much as you interrogate them. You both h ave to agree that it's a good match in order to proceed.

The franchisor will send you brochures and other materials, and most likely requ est that you complete a questionnaire. You will proceed based on the outcome of that exchange of information. The next step will be your evaluation of the company's Uniform Franchise Offerin g Circular (UFOC). The Federal Trade Commission (FTC) requires this document be provided to disclose detailed information about the franchisor at least 10 days prior to any franchise purchase. That information includes: The franchisor, its predecessors and its affiliates Business experience/history Litigation Bankruptcy Initial franchise fee Other fees Initial investment Restrictions on sources of products and services Franchisee's obligations Financing Franchisor's obligations Territory Trademarks Patents, copyrights and proprietary information Obligation to participate in the actual operation of the franchise business Restrictions on what the franchisee may sell Renewal, termination, transfer and dispute resolution Public figures Earnings claims List of outlets Financial statements Contracts Receipts For more information about deciphering the UFOC, visit Franchise411.com. Visit as many of the franchisor's existing franchisees as you can. Meet directly with the owner of each establishment, and pay close attention to opinions of th e franchisor. Ask the owners about the support they get on an ongoing basis, as well as the training and assistance they received when they first purchased the franchise. Did the franchisor help them with the location decision, and assist w ith initial set-up? What about the promotional efforts of the franchisor? Does t he individual franchisees benefit from their investment? Do they get any say in how the advertising dollars are spent or allocated? Are their earnings living up to their expectations? Did their total investment stay in line with what they w ere expecting? Ask specifically if they would do it again knowing what they know now. These opi nions are very important to your research into each franchise. Look for trends t hat might indicate overall dissatisfaction with the company -- and avoid those l ike the plague! Review the franchisor's business plan, operations manuals, and market analysis. Try to meet with the franchisor in person. Make a point to meet the franchising operations personnel with whom you will be dealing. Keep these questions in mind while you are meeting with them: Is the information you are given clear? Does the training program appear to be thorough? Does it match what you were told by their existing franchisees? Does the market look strong? Are there too many existing franchised locations in your area? If the area is al ready saturated, you may need to look elsewhere (either in location or business) . Are there no locations in your area? This may not necessarily be a good thing ei

ther. It may mean that the competition has a strong hold on that regional market and you'll have a difficult time getting a share of it. Take careful notes about each franchise opportunity you are investigating. Make sure you understand all of their policies and have a good feel for the level of satisfaction their existing franchisees have. Then use this information to make your final decision. Creating a Plan Most likely, when you set out to buy a franchise you will need a business loan o f some sort. To get a business loan, you will also need a business plan. Writing a business plan for a franchise, however, is slightly different from writing on e for your own new business startup. Not only do you have to detail the business strategy and projections of the franchise, you also have to detail the reasons why you are qualified to run the business. While the franchisors may provide some assistance in helping you get the financi ng you need, they probably won't provide much in the way of helping to write a b usiness plan. This is because they can't take the liability risk of helping you make projections on sales. If those projections fall short, there is the chance of a lawsuit. You may be provided with a template for a business plan, but this is usually provided after you have signed the agreement and gone into their trai ning program. The template will still not provide any information about projecte d financial information. That leaves you doing as much research into the market, and particularly the com petition, as you can. Visit our Business Plans Workshop for some advice and assi stance in writing a complete business plan. Some of the differences you'll have to adjust for include building the franchise fee, royalties, advertising fees, and other franchise-related payments into the financial documents. Your accountant should be able to provide valuable assista nce in this area. The Legal Aspects There are many elements of the franchise agreement, as well as the franchise dea l itself, that can benefit from the advice of an attorney. These can include: Reviewing the franchisor's offering circular (the UFOC) and evaluating the oppor tunity Negotiating points of the final contract Limiting your personal liability by establishing the correct business structure Dealing with trade secrets and other proprietary issues Establishing your own trade name Dealing with state statutes Your best bet is to use an attorney who specializes in franchises. The ABA Forum on Franchising is the association that publishes the Franchise Law Journal and also maintains a list of Who's Who among franchise attorneys. Make sure your sel ected attorney is a member of this organization, not because it screens them in any way (there are no membership requirements), but because the organization its elf stays on top of franchise law and offers seminars and other current franchis e information for members. Using an attorney who is a member would be a benefit. Even though you may use an attorney for these areas, you may still want to brush up on the laws yourself. The Federal Trade Commission (FTC) enforces franchisin g regulations and investigates any complaints. The Franchise Rule deals with the franchising contract and requires that the franchisor give full disclosure of e arnings, company history, litigation, and key-officer experience levels. It also requires that contact information be provided for existing franchised units. Th e rule does not, however, cover anything that happens after the contract is sign ed, such as problems with product availability, site selection, and placement of other units within the same geographical market.

There are some groups pushing for uniform standards of conduct once the franchis e agreement has been signed. The Asian American Hotel Owners' Association (AAHOA ) is one that has actually created its own 12 Points of Fair Franchising in orde r to improve relationships. The agreement deals with issues like who pays for br and reimaging, new signage, dispute resolution and database information. National fair franchising legislation was also introduced. HR 3308, also known a s the Small Business Franchise Act, was introduced in 1999 by representatives Ho ward Coble, R-NC, and John Conyers, D-MI. The legislation would provide franchis ees with a right of action in federal court in the event that the corporate fran chise violates any provision of HR 3308. It was sent to the House Subcommittee o n November 17, 1999. It was tabled during the 106th Congress, but is slated for reintroduction in the 107th Congress. There is bipartisan opposition to the bill in the Congress; however, organizations such as the American Franchisee Associa tion highly support it. Opposition states that the bill tries to establish a "on e size fits all" model to franchising, and that simply won't work with the many differences in franchise businesses and systems. In addition to this, 16 states have their own franchise relationship law. At the End of the Road Part of the franchise agreement will cover what happens at the end of the term. Many franchise systems offer renewal options for the franchisee. In some cases, however, the franchise company will try to deny the renewal. There are 16 states that have franchise relationship laws in place. If the franchisor tries to deny renewal in one of these states, it may be violating state law. The focus of the laws in these 16 states is on regulation of the renewal and termination of fran chises. Nearly all franchise statutes that address renewal issues require specif ic franchisee misconduct for a franchisor to be able to deny renewal. There are, however, some states (California and Wisconsin) that permit a franchise to deny renewal for economic reasons, such as a company-wide decision to discontinue fr anchising. The conditions for any of these non-renewal situations would be a part of the or iginal franchise agreement. Transfer of Ownership Transferring ownership of a franchise may also be more difficult than you might think. There may be provisions and restrictions in the franchise agreement that prohibit it, or at least restrict it. It is a difficult situation because the fr anchisee owns the assets of the business, but the franchisor owns the brand and trademark. Ownership transfer elements of franchise agreements often include these types of statements: The franchisor gets the right to approve transfer. The franchisee must execute a release (unless limited by state law). The franchisor gets final approval of the prospective franchisee's qualification s. There are limitations on transfers to competitors (usually upheld by courts). The franchisor gets the right of first refusal under the same terms as the prosp ective franchisee. The franchisee must have no outstanding fees owed to the franchisor. Three of the 16 states with franchise relationship laws (Iowa, Michigan, and Wis consin) also have provisions that directly relate to franchise transfers.