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The Safer Way to Start a Business

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There is one silver lining to the economic misery surrounding us -- more Americans are likely to start their own businesses this year. While that may seem counter-intuitive, it actually makes sense. After all, the corporations and companies that have laid off millions of people, aren't going to start hiring anytime soon. So starting a small business becomes an appealing alternative to a frustrating and never-ending job hunt.

Business start-ups grew significantly following the recession of 1990-91. And starting in the 2001 recession, franchising, one segment of small business, underwent a bit of a growth spurt, with the number of franchised units growing nearly 6 percent annually through 2005. While the outlook for this year is not quite so positive (the International Franchise Association says the number of units will fall about 1 percent), there's good reason to believe thousands of Americans will at least explore the idea of buying a franchise in 2009.

For many, franchising represents a safer choice than building a business from scratch. After all, the failure rate for a franchised business is lower than the overall business failure rate and the franchisor is offering you a system that's presumably been battle-tested.

That's not to say it's easy to buy a franchise. It's not, which is why you need to arm yourself with as much information as possible before making a buying decision. Luckily, it's easier than ever to do that. Here are some tips:

1. You can see how franchises match up against one another by checking out the latest franchise ranking, the AllBusiness.com AllStar Franchises. (Full disclosure, my company helped AllBusiness develop this listing.) It can help you sort through hundreds of opportunities and emerge with the best franchise match for you. You can not only sort on the top 300 franchises in the ranking, but on any one of six different factors, which might be more important to you.
For example, the recession has made it a bit more difficult for prospective franchisees to get financing. To help prospective buyers get past this, some franchisors are offering creative solutions, like waiving the first few months of royalty payments or discounting the franchise fee. Everything is negotiable these days, so when you talk to a franchisor, ask for concessions. You can sort the AllStar Franchises by how much financing assistance franchises offer incoming franchisees.

2. After you narrow down your choices, it's time to find and speak with existing franchisees. Sure, a list of franchise outlets is listed in the Franchise Disclosure Document (FDD) which a franchisor must, by law, give you before you make a final decision, but why wait? Call franchisees in your community and across the country. Since franchisees all use the same company name, they're easy to locate. Ask the franchisee about their experiences with the franchisor. Did they get adequate training? How's the support from headquarters? Ask about their challenges and concerns. And most important, ask if they were buying into the system today, would they still do it? Why or why not? Franchisees, happy or unhappy, love to share their experiences.

3. Read the FDD carefully. It gives you the inside scoop on what to expect from the franchisor in return for your fees: the level of training and ongoing support you get, the background of the people who run the company, and the franchisor's financials.

4. Have an accountant look at the company's financial statements. The AllBusiness AllStar listing also ranks franchises by their financial stability, as determined by their status with D&B. In these turbulent times, you'll want to make sure the parent company is adequately capitalized.

Franchising does not necessarily come cheap. Your initial investment will vary greatly depending on the industry and type of business you're interested in. Startup costs can be relatively low (less than $20,000) or fairly pricey (over $1 million). According to the IFA, the average investment is between $350,000 and $400,000. On top of this, you'll pay an ongoing royalty fee to the franchisor, which is generally a percentage of your gross sales.
Is it worth it? Buying a franchise helps mitigate some of the risks of starting a business.

Franchising is not for everyone though. If you like to "march to the beat of your own drum", you're likely to rebel against the rules franchisors impose. On the other hand, if you're been recently laid off, have no experience in a particular industry or don't mind being part of someone else's system, franchising might be right up your alley. It's certainly worth taking a look.