Guaranteed success? Guaranteed profits? Are you lured into franchise ownership by the common myths surrounding franchises? Don't jump into becoming a franchisee until you have uncovered all of the common misconceptions and the surprising truths about franchise ownership. From super low costs to exclusive territories and rights, find out what is franchise fact and what is franchise fiction.

Myth #1: Franchises are guaranteed to succeed

Many people are attracted to franchises because of the belief that franchises are guaranteed to succeed and be profitable. It sure seems that way with a new franchise popping up every day on every corner. Prospective franchisees must realize, however, that no business venture is without risk, and franchises do fail. The two most common reasons franchises fail are undercapitalization and a failure to follow the established franchise system. That said, an astonishing percentage of franchises--95% in fact--survive at least five years. This high success rate can be attributed to a combination of factors: first, most major franchise chains engage in a thorough selection process that weeds out most potential owners who are not cut out for franchise ownership;and second, the high financial requirements of many franchise chains guarantee new franchisees will have sufficient working capital to operate their businesses for as long as it will take to generate business and begin earning profits.

Myth #2: It is cheaper to buy a franchise than to start my own business

It is a very common misconception that franchises are cheaper to start than new businesses, but that is not necessarily true. Franchises have the same up-front costs as start-up businesses, including equipment, supplies, and the construction, purchase or lease of land or real estate (unless it is a home-based business). In addition to those costs, however, franchises also add on franchise fees that range from tens of thousands to hundreds of thousands of dollars. These franchise fees license the name, logo, and trademark of the franchisor to the franchisee for use in his or her business. That franchise fee also sometimes includes marketing costs and additional fees. Plus, once your franchise business starts generating revenues, you will be sending a percentage of those profits back to the franchisor as royalty fees and an additional percentage back as advertising fees. Franchises may be cheaper than start-up businesses, but that is not always the case. Be sure to carefully research all of the immediate and long-term costs that are associated with the franchise you choose in order to determine just how affordable it really is.

Myth #3: All popular chains are franchises

There are two ways in which companies can expand by adding stores: one way is a franchise model in which each store is owned and operated by an individual owner; in the second model, each store is company-owned and is run by a manager hired through the parent company. And although recent studies show that franchises perform better financially than their non-franchise competitors, many popular stores have avoided the franchise model and have no intentions to franchise in the future. Do you know which of the following popular stores are franchises and which are company-owned?

Coffee Beanery
Starbucks
Alphagraphics
Kinko's
Outback Steakhouse
Lone Star Steakhouse
Applebees
Benihana
Cheesecake Factory
Jack in the Box
O Charleys
Panera Bread Co
Bob Evans

The franchise companies listed above are Coffee Beanery, Alphagraphics, Outback Steakhouse, Applebees, Benihana, Jack in the Box, and Panera. Non-franchise competitors are Starbucks, Kinko's, Lone Star Steakhouse, Cheesecake Factory, O Charleys, and Bob Evans.

Myth #4: It is better to buy a franchise that is already well-established in my region

There are pros and cons to opening a franchise that has already become established in your region. On one hand, established franchise systems already have a local customer base and future customers already know what products or services you offer and what kind of quality to expect from your business. On the other hand, if a competing branch of your franchise has already opened in your region and the market is limited, you may not get prime business territory. If the other shop is located on Main Street, will there be enough business to share, and will you see customer traffic if you are located on Second Street or Third Street? Before opening a second or third brand of a franchise in the same area, do some investigation and find out whether there are enough customers to share in your region. Do customers go out of their way to visit the other branches? Would your branch add convenience for a percentage of the customer base? These questions and more can help you determine whether or not two branches can compete in the same area and both succeed.

Myth #5: You are protected from direct competition in your location

When you purchase a franchise, your contract guarantees you the rights to your territory, but some contracts are ambiguous or unclear when it comes to really protecting the franchisee. Look carefully at the details of your contract to see how it handles certain situations that might leave your franchise vulnerable to competition from another branch, including a time frame after which your territory is negotiable. Other circumstances that could arise include if the franchisor company merges with another company, is acquired, or begins operating a second chain of competitive stores under a different trademark. A strong franchise contract will clearly define how your territory is protected in each of these situations. It is a good idea to have an attorney review this portion of your franchise agreement to make sure there are no loopholes or caveats in the contract that could leave you or your business vulnerable.

Myth #6: The higher the cost of the franchise, the larger the financial returns

When investments are strictly financial, the old adage is true that the more money you invest, the more money you make. But because owning a franchise is an investment of your time and skills as well as capital, you should expect a return higher than that which you would receive from a strictly financial investment. By seeking a franchise that leverages your skills and talents more than the money you put into it, you can reach higher levels of returns regardless of the initial investment or the up-front franchise fee. As a result, the higher priced franchises often have smaller returns, especially initially. Want to see your investment pay off from the beginning? Seek a franchise, even one that costs under $50,000, and leverage your skills instead of your dollars.