10 golden rules to apply when buying a franchise.

There's no hidden formula for business success, but here are guidelines for starting a profitable franchise

WHETHER IT'S THAT BUSINESS TRIP TO MIAMI or a vacation getaway to the Bahamas, consumers will always need to make travel accommodations, as Leo and Gwendolyn Miller realized when they bought a Travel Network franchise seven years ago.

"I always enjoyed traveling and making the arrangements whenever we vacationed," says Gwendolyn, 62, a teacher at St. John's University. The Millers were impressed with the company's support system. Travel Network, a full-service retail travel agency headquartered in Englewood Cliffs, New Jersey, trains future owners in every area from sales to marketing. Founded in 1982, it boasts some 300 franchises in 35 states, of which 37 are black-owned. The Millers, who grossed $700,000 in sales revenues last year, say their success is tied to their clients' strong allegiance to the franchise, which in turn means repeat business.

The Millers belong to an ever growing group of more than 8 million people who draw their paychecks from franchising. They come from every walk of life, from corporate professionals to homemakers. Travel to any town in America and you're bound to find a franchised business. There are more than 500,000 of these business in the U.S., generating more than $8 billion in sales.

Owning a franchise offers you the freedom to become your own boss without having to start a business from scratch. But don't think franchise ownership is easy. Yes, you can expect training and support from the franchisor, but you have to manage the business--which often means 70-hour work weeks.

Here are 10 important rules to help you understand what's required in operating a franchise business--before you invest.

1 KNOW THYSELF 

Do you have relevant management experience? Are you able to juggle various roles? Can you adhere to strict guidelines? Do you know how to delegate tasks efficiently? If you answered yes to the above questions, you may have the making of a franchisee. However, there is still one important question you have to ask yourself: will you enjoy the work?

After working 10 years as a senior accounting executive for the Kendall Co., Matthew Ware decided to launch his own business. While serving on the city council in Athens, Georgia, Ware met Walter L. Padgett, founder of Padgett Business Services, a small business accounting and tax service franchise.

After reviewing several similar firms, including H&R Block, Ware decided to open a Padgett Business Services franchise. "I liked their approach to business and expertise," says the 39-year-old entrepreneur, who is now using his expertise to help small and micro businesses. Taking his personal savings--about $50,000--Ware started the business in 1991. Last year, sales topped $145,000.

Padgett is among those franchises requiring firsthand knowledge of the business. "Most of our franchisees are products of corporate America," says Roger Harris, president of Padgett USA. "We look for a strong background in math and a sizable amount of financial strength."

2 RESEARCH THE MARKET

There are three primary categories covered in the franchise market: service (diet centers, hair salons, exercise studios), convenience (restaurants, fast food and specialty food stores) and retail (auto, hardware and home furnishing stores). You'll need to gather data to determine if the demographics of your desired location will support the business.

If the franchise chain is small, you'll tend to receive more personalized attention; on the other hand, a large chain will allow you to operate your business more independently. Harris advises would-be franchisees to "talk to existing owners in their market area to get a clear understanding of what the day-to-day business operation entails."

3 INVESTIGATE THE FRANCHISOR

You've just sat down to a slick sales presentation with visual overheads, glossy brochures and convincing oral testimony. Now you're ready to commit. But before you sign on the dotted line, ask yourself, how well do I know this franchisor? Has the franchisor ever been involved in litigation? For example, Denny's began to actively woo black franchisees following a major civil suit for race discrimination.

How qualified are the officers and district managers? Do the field reps have extensive experience? The more experience a franchisor has in operating a business, the increased industry know-how he or she will have, says Terrian C. Barnes, vice president of public affairs at the Washington, D.C.-based Inter-national Franchise Association. Talk to other franchisees about the management style of the franchisor. Ask about training programs, advertising campaigns and staff credentials.

To find out if your franchisor has a solid reputation, contact the American Association of Franchisees and Dealers (AAFD) at 619-235-2556. Under its new Fair Franchising Standards, franchisors will be offered accreditation of fair practice. The American Franchise Association in Chicago provides educational and referral services; call 312-431-1467.

4 SCRUTINIZE THE PROSPECTUS

The Uniform Franchise Offering Circular is the most important document you'll come across in your quest for business ownership. The contract equips the prospective franchisee with information about the franchisor and obligations. By law, this knowledge must be presented before you purchase a franchise. If, after digesting the information, you feel ready to commit, you still have 10 business days to decide whether or not to sign the agreement, according to Federal Trade Commission Rule 436.1.

The offering circular is a lengthy document with 15 sections; topics range from the granting of a franchise to its enforcement and construction. Consult an attorney with franchising expertise before signing any agreement. Check the offering circular against AAFD's free pamphlet, Franchisee Bill of Rights.

If there's anything you don't fully comprehend, refuse to put forth your signature. If a franchisor tries to coerce you into signing a leasehold agreement or accepts a deposit, it can be held liable on criminal charges.

5 COME TO THE TABLE WITH MONEY

Undercapitalization is the reason most small businesses fail--and a franchise is no different. With start-up costs ranging from as little as $1,000 to more than $1 million, you should plan to have enough funds to sustain you for at least a year. When thinking about financing your franchise, your first source should be savings, family and friends, partners or investors. You may be able to get some financing from the franchisor but expect very little. Once you prepare your financial proposal--i.e., business plan--you will be able to assess if your business can handle the monthly payments and still make a profit.

Pamela Carruthers was able to secure a micro loan for $25,000 through the Corporation for Economic Development of Harris County (Texas) to open up a Computertots franchise. She financed the balance from personal savings. A stipulation of the loan was that borrowers take classes in areas such as finance, advertising and accounting, which proved advantageous to Carruthers, a former corporate lawyer.

The 38-year-old mother was attracted to the home-based business because it gives her the chance to work with children and the flexibility to spend time with her own two daughters. "Any business venture I pursued had to involve a tried-and-true concept," she says, "because I was interested in following a great example, not reinventing the wheel." With over 186 franchise units worldwide, Computertots holds weekly classes that teach some 40,000 children, ages three to 12. Franchisees must be willing to constantly update their curriculum by adding new programs and devices.

6 SEEK OUT SUPPORT SERVICES 

Ask to see an operating manual. Is it comprehensive? Can you actually run your business by what you see in front of you? You should because the manual will become your guide for day-to-day operations. Do you feel comfortable with the home office staff? You will be calling on them for advice and ongoing assistance. Is your franchisor supplying you with goods? If you get all your coffee beans from your franchisor, have you figured out what you would do if your monthly supply was suddenly cut off? Does your franchisor have an alternate? Would there be restrictions placed on you if you obtained products from another source?

"The whole objective of franchising is to get and keep customers," says Stephen D. Warren, vice president of corporate affairs at Wendy's International, who believes the franchisor has an obligation to help the franchisee become successful. "Franchisors should be constantly building their brand name, improving the operating system, rolling out new products, reducing labor costs and increasing efficiency of operation," he says.

7 ESTIMATE ALL COSTS

Franchise fees and royalty fees (which are based on sales) are the most widely known charges, but are you aware that the use of a franchise trademark or name may also include a fee? Did you also know that royalty fees are usually payable every month?

When estimating costs, be sure to include total costs, not just your franchise fees. There is the cost of construction and decorating or remodeling. There may be costs for centralized bookkeeping and data processing services. As a small business you'll be responsible for payroll tax, rent and insurance, so try your best to flush out any hidden charges. Once you've calculated these figures, you will get a better picture of the profit your franchise operation can bring.

8 SCOUT OUT A LOCATION

It's important not to have other franchises competing in your area. This may not always be possible, but by researching the area you can determine how much competition your franchise will face. You may not be responsible for site selection.

Although most franchisors have the right to approve the site location, there is a growing trend toward letting the franchisee choose the site after being given a territory. Still, a franchisor almost always retains the rights to approve a site, says Robert Purvin, CEO of the San Diego-based AAFD and author of The Franchise Fraud: How to Protect Yourself Before and After You Invest (John Wiley & Sons; $27.95). In some cases, franchisors are erecting new stores down the block from old outlets (an issue of encroachment).

Territory is the subject of most franchisee/franchisor disputes, followed closely by claims of agreement violations and conflicts over contract renewals, says Don DeBolt, president of the Inter-national Franchise Association. DeBolt notes that the agency is enhancing its three-year-old, National Franchise Mediation Program, which is designed to provide alternatives to long and costly legal battles.

9 CREATE AN ADVERTISING BUDGET

It's the big grand opening of your franchise. You've advertised on the radio and in local papers. You submit the bills to your franchisor--but your claim is denied. This scenario can play itself out if you do not factor in from the onset who will be responsible for advertising costs. Find out whether you're required to participate in an advertising pool and if you have to pay an additional fee for local advertising. If you do belong to a pool, find out what portion of the budget will be spent advertising in your area.

10 DEVISE AN EXIT STRATEGY

You've signed the franchise agreement. The business is established. But there's no pedestrian traffic. To make matters worse, your franchisor advertises only in major cities. Each day you stay in business, the more money you lose. You want out, but you're bound by the franchise agreement. So, how do you terminate the contract? Can you terminate for reasons other than willful lying on the part of the franchisor? What will happen to the lease and assets of your business if you negate your obligation? Before you think about signing a franchise agreement, make sure the clause in the contract includes an exit provision.

Purvin notes that a typical franchise agreement gives the franchisor 30 different grounds to terminate your contract, while you have none. One way to safeguard yourself is to seek equity in the franchise. "In today's market, franchisors do not grant franchisees any termination rights," he says. "The evolution of feudalism is exactly what many franchisees are going through today--indentured servitude."

For the record, you can renegotiate the contract. The franchise contract was essentially written for the protection of the franchisor. Thus, follow the age-old tenet: caveat emptor, or let the buyer beware. In general, contracts last for 10-20 years. "You can't possibly figure out if a franchise system is for you unless you know your short-term and long-term goals," cautions Barnes. "If your first inclination is to start making changes or that you've got a better way to do it, then start your own business."

In the final analysis, franchising can be rewarding if you prepare for the business highs and lows. By educating yourself, understanding the rewards and risks, and effectively communicating with your franchisor, you can achieve financial success and business independence.