Press Room

Franchises for would-be entreprenuers

Money Management

Monthly financial advice
from the MACPA

For release: September 2005

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 Maryland Association of CPAs 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 from help with site selection, training, store design, operating procedures and marketing materials.

On the down side, franchises can be expensive and, even though it's your 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 prospective franchisees with a comprehensive document called a "Uniform Franchise Offering Circular (UFOC)." The document is required by law to be written in plain English. 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, and conditions for termination.

Study this document carefully so 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 you pay for this with a hefty franchise fee. 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 from 3 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 franchise help with ads, bookkeeping and personnel matters? What about supplies and equipment? Some franchises require that you buy almost everything you need from them. If that's the case, 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 franchise you're considering. Don't limit yourself to local franchisees. These individuals may view you as a potential competitor and may discourage you.

Speaking with current and former franchisees is probably the most reliable way to learn more about the company you're considering. Try to get a sense of their overall experience with the franchise. Find out whether there were any unanticipated costs. A good question to ask is whether they would invest in another outlet. Talk to former franchisees as well to find out what went wrong.

Visit the home office of the franchisor

If at all possible, try to meet the franchise's key players — the principals and those who manage the training, accounting, operations and customer service functions. Make a judgment about whether they are they 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.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.

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