Although I've categorized this factor as a "negative", it can equally be viewed as a positive. As a franchisee, you want to know that your franchisor is not going to allow its franchisees to damage reputation of system in which you've invested your hard-earned dollars.

-> Pay initial franchise fee and purchase price

There may be an initial investment ranging from a few hundred to tens of thousands of dollars to buy into a franchise.

-> Pay ongoing royalties

In addition to initial franchise fee and purchase price, most franchisors will also charge an ongoing royalty for rights to use franchised system. These royalties are usually calculated as a percentage of turnover but various other fee structures exist.

-> Restrictions on ability to sell business

Some franchise agreements can restrict quite severely your rights to sell your business to another franchisee. They may impose strict criteria for proposed purchasers and you may find it difficult to find buyers who meet this criteria.

-> May not be able to realize value for business on termination

Some franchise agreements state that upon expiration or termination of franchise agreement, goodwill of business reverts to franchisor. This means you may have operated and developed a business over many years and yet, when franchise agreement expires, you effectively walk away from business with no further financial compensation.

Under this type of arrangement you must understand going in that you are expected to derive your financial return during term of franchise agreement by way of annual profits, not by way of a capital gain at end of franchise term.

WHAT TO LOOK FOR IN A FRANCHISE

-> An established franchise system with a good reputation.

-> Comprehensive training systems for both your own management team and other employees.

-> A relatively harmonious relationship between franchisor and franchisees. Some friction from time to time is inevitable in any long-term business relationship but a constant atmosphere of hostility, mistrust and long-running disputes can be a warning sign of an unstable system.

On other hand, if you're looking at a franchise system of any significant size, a completely harmonious relationship between franchisor and franchisee can be a signal that management of franchisor is weak. Although a weak management team on franchisor side may translate into short-term personal benefits for franchisees, in long-term it undermines stability and foundation of franchise system itself and, ultimately, value of your investment.

-> Ethical business practices both by franchisor and existing franchisees.

-> An inclusive "partnership" approach on part of both franchisor and franchisees. This does not mean that franchisor should not impose controls on system but you should look for a spirit of goodwill and cooperation, willingness to listen to others' ideas and a climate of open communication at all levels throughout organization.

-> Exclusive territories - although not crucial, exclusivity of territory (where franchisor grants you a limited but exclusive territory which is yours alone) can in some cases be a relevant factor to competitiveness of business. It would be fair to say that it does not benefit franchise system if franchisees are forced to compete with each other for limited business.

These are just a few of major factors you should take into consideration when deciding whether a franchise is for you. Although franchising minimizes risks of business failure, it cannot not eliminate them entirely and any decision to proceed with a franchised business should only be made after a thorough reading of franchise agreement and accompanying disclosure documentation and obtaining professional advice of both your lawyer and your accountant.

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