When you are thinking about buying a franchise, it is critical to make sure you are making informed decisions. While you can find lots of useful information online, you need to be careful to ensure you are not relying on inaccurate information that will compromise your decision-making. Reading blog articles from a reputable franchisee law firm is a good option, and looking at government resources is a good option as well.
Or, at least, it is usually a good option.
But sometimes even the federal government gets it wrong. Last year, the U.S. Federal Trade Commission (FTC) published an article titled Franchise Fundamentals: Debunking Five Myths About Buying a Franchise. Unfortunately, “Myth #1” and “Myth #2” aren’t actually myths. They misstate two of the fundamentals of franchise ownership, and prospective franchisees relying on this resource may find themselves confused—or worse, with unreasonable expectations about the franchise relationship.
Not a Myth #1: “Being a Franchisee is the Same as Owning Your Own Business”
The first “myth” listed in the FTC’s article is that “Being a franchise is the same as owning your own business.” Contrasting this “myth,” the article goes on to state: “Owning a franchise isn’t the same as being a business owner.” This simply isn’t true.
As a franchisee, you do own your own business; and, crucially, you are responsible for your own business’s success. When you buy a franchise, you buy a license to operate a business under the franchisor’s brand name and system. You are also paying for the franchisor’s training and support—although what you get for your money varies greatly from one franchise system to the next.
However, fundamental to the nature of franchising is that you use your license to operate your business. You will form a business entity (usually a limited liability company (LLC) or corporation), and this business entity will be yours. If “the business” fails, it is your business that fails. The franchisor will keep operating, and if it terminates your franchise, it will probably grant another franchise to someone else who is interested in your territory.
Financing, real estate leases, vehicle and equipment leases, inventory purchases—these are all things that will be in your business’s name and be your business’s financial responsibility. As a result, if your franchise fails, moving on isn’t as simple as walking away. Your business will still have debts to pay (and your franchisor may seek to recover liquidated damages as well), and if you signed any personal guarantees, you could be on the hook if your business isn’t self-sustaining.
Not a Myth #2: “Buying a Franchise Will Give You ‘Be Your Own Boss’ Status”
The second “myth” listed in the FTC’s article is that “Buying a Franchise Will Give You ‘Be Your Own Boss’ Status.” Contrasting this “myth,” the article goes on to state:
“After years of earning a salary, many prospective entrepreneurs look to franchise ownership as a way to exercise autonomy. Not so fast. . . . If part of your motivation for considering a franchise is to live that “be your own boss” lifestyle, investigate thoroughly first.”
Owning your own business necessarily means being your own boss. Additionally, the franchise model is based on separation between the franchisor and the franchisee. Franchisors and their lawyers go to great lengths to make sure that their franchisees aren’t classified as employees.
When you own a franchise, you make the decisions about how to run your business. You must operate within the confines of your franchise agreement and the franchisor’s Operations Manual, but you will be deciding what you do on a day-to-day basis. You will be your own boss; and, if you hire employees, you will be their boss as well.
As a prospective franchisee, it is a mistake to assume that you will be able to rely on your franchisor for your success. This isn’t the case—and, if you expect your franchisor to tell you what to do and how to build a successful business, you will be in for a rude awakening. Owning a successful franchise requires a substantial investment of both money and time, and you must be confident in your abilities as a business owner as well as your abilities to manage your own time.
Myths that the FTC’s Article Gets Right
While the first two “myths” in the FTC’s article miss the mark, its three remaining myths are spot on. Here is a look at what the FTC’s article gets right:
- Myth: “Liking a company’s products is the best indicator that you’ll achieve success as a franchisee.” – While it is generally a good idea to choose a franchise concept about which you are passionate—as this will help maintain your interest in the business over the multi-year term of your franchise agreement—liking what the franchisor’s products is not itself an indicator of success. There are numerous additional considerations involved in evaluating the viability of a franchise opportunity.
- Myth: “Owning a franchise is an excellent source of passive income.” – As a single-unit or even multi-unit franchisee, owning a franchise almost certainly will not be a passive endeavor. Even if you hire managers to run your outlet (or outlets), you will still be very much involved in the business on a day-to-day basis.
- Myth: “Owning a franchise is a financial ‘sure thing.’” – Buying a franchise is never a sure thing. In fact, the statistics show that a significant percentage of new franchises fail within the first two years. Making an informed buying decision is one of the first steps toward maximizing your chances of success, and this involves working with an experienced franchisee law firm to ensure that you are considering all relevant factors.
Contact Our Franchisee Law Firm for a Free, No-Obligation Consultation
If you are thinking about buying a franchise and would like to learn about how we help prospective franchisees make informed buying decisions, we invite you to get in touch. Call 202-293-3947 or contact us online to schedule a free, no-obligation consultation today.
