Buying a Janitorial Services
Franchise
Produced jointly
with the Maryland Attorney General’s
Office.
Contents
How
Janitorial Services Franchises Work
Problems
You May Face
The
FTC’s Franchise Rule
Protect
Yourself
For
More Information
Glossary
of Terms
f you're thinking
about starting your own business and have
only a small amount to invest, you may be
considering buying a janitorial services
franchise. For a fee, a janitorial service
company (the "franchisor") typically
provides you (the "franchisee")
with customers and marketing, billing and
collection services.
Every franchisor has success
stories to share. Be cautious. While success
in the janitorial service industry is possible,
it's not a guarantee.
A glossary of terms commonly
used in the franchise industry is included
at the end of this brochure.
How Janitorial Services
Franchises Work
In a typical janitorial
cleaning franchise, you pay the franchisor
a fee for a "package" of cleaning
accounts. The fee is based on the dollar
value of cleaning accounts that the franchisor
will make available. The fee usually is
about half the gross income the accounts
are supposed to generate in a year. For
example, for a fee of $10,000, you'll get
accounts worth $20,000; for a fee of $15,000,
you'll get accounts worth $30,000. You also
may have to pay ongoing royalty or management
fees.
The franchisor may offer
you financing. This may sound especially
attractive if you have trouble getting credit
from traditional lenders.
The franchisor is supposed
to offer you cleaning accounts that will
produce the level of income represented
in the package you purchased. However, several
factors can affect that level of income.
For example, if you don't accept an account,
the franchisor may not have to offer you
a substitute. Or, if you refuse an account
because you feel it's located too far away,
you may lose your right to that income.
Also, if you lose accounts because you did
a poor cleaning job, the franchisor doesn't
have to replace those accounts.
Problems You May Face
The Federal Trade Commission
and the Maryland Attorney General's Office
advise you to use caution when thinking
about buying a janitorial services franchise,
which often appeal to immigrants and others
who speak limited English. The franchise
agreement you'll receive from the franchisor
may be long and complex. It may be difficult
to understand your legal rights and obligations,
and the obligations of the franchisor. Consider
getting professional advice. Ask
a lawyer, accountant or business advisor
to review the franchise agreement. The money
and time you spend on professional help
may save you from a bad investment.
Here are some of the problems
you may face:
- Accounts offered versus accounts
received. There may be a difference
between the accounts the franchisor promises
to offer you and the accounts you actually
receive, as well as the revenue that comes
with them. For example, the franchisor
may promise to offer you accounts generating
$1,000 in monthly billings for the first
year. To meet its obligations, the franchisor
may offer you more than one cleaning account.
But given time conflicts, distance issues
or other problems, you may not be able
to accept all the accounts the franchisor
offers. What's more, the franchisor may
offer the same accounts to several franchisees
on a first-come, first-served basis. If
you can't accept an account because you
can't get to the location, or if another
franchisee accepts the account first,
the franchisor may have satisfied its
obligation to offer you accounts. Because
the franchisor may not tell you about
this policy before you buy the ''package"
of accounts, you should not count on receiving
all the revenue that the franchisor promised
at first.
- Rejected accounts.
The franchisor may not have to replace
an account that you reject.
- Franchisor-selected accounts.
The franchisor usually selects accounts
for you. The size, number and location
of the accounts may not be what you expect.
For example, the franchisor may require
you to service more than one account at
the same time, or the job sites may be
far apart.
- Lost accounts. Most
janitorial franchise agreements specify
that if a customer cancels the cleaning
contract, the franchisor doesn't have
to replace the account for you. In fact,
you may have to pay an extra sales and
marketing fee for a new account to make
up for the lost income.
- Integration clauses. The
franchise agreement you sign may contain
a clause that limits the terms of your
agreement to those specifically detailed
in the written franchise agreement. This
means that any oral claims or promises
made by the franchisor are not part of
your agreement. This is one reason why
it's so important to get all promises
in writing in the franchise agreement.
- First year time lag for receiving
accounts. The package of accounts
you buy will suggest a level of income
within a year. But the franchisor may
take several months to supply you with
the promised accounts. That means you
may not earn any income until several
months after you've purchased the package,
so you may not earn the estimated annual
income. Therefore, it's important to have
other sources of income during your first
few months of operation.
- Ongoing fees. The franchisor
may charge you a monthly management or
service fee. You'll have to pay the fee
even if you don't have any income from
your cleaning business that month. If
you finance the franchise fee, you must
make the monthly payment on that debt
whether or not you're receiving income
from the cleaning business. And although
you may find customers without the franchisor's
help, any income from a cleaning account
you solicit will be included when the
franchisor calculates the royalty and
management fees you owe.
- Franchisor-owned accounts.
The franchisor may own all the customer
accounts, including those that you get
on your own. This means that if your franchise
agreement ends, you will not be able to
service the accounts for which you paid
a fee, and you won't be able to service
the accounts you got on your own, either.
- Training. Get information
about the franchisor's training program
before you invest. The franchisor decides
the type of training you'll get. It may
involve watching videos and reading books;
it may not involve classroom or on-site
training.
- Contract bidding procedures.
The franchisor may not tell you how it
bids for cleaning contracts or what specific
services you must provide to the customers.
The franchisor may only tell you that
you should be able to earn $12 to $15
an hour doing janitorial work. However,
when bidding for cleaning contracts, the
franchisor may offer your services at
a lower rate, and you may have no say
in whether the amount charged is reasonable.
So even though the account is represented
as being worth a certain amount of money,
it may not be worth that much to you,
and you may not be able to make a profit
once you pay for expenses like supplies
and transportation costs.
- Short-term accounts.
People who operate janitorial franchises
often find that customers rarely maintain
an account for more than a year. That's
because customers prefer short-term contracts
so they can shop for the best deal. If
the franchisor offers you replacement
accounts, you may have to pay a new referral
or marketing fee.
- Performance obligations.
You may have to meet minimum monthly performance
or growth requirements. If you don't,
you may lose the franchise. Worse yet,
you may not have the right to a refund
of your franchise fee.
- Payment for services.
The franchisor collects payment from your
customers. If the customer doesn't pay,
you don't get paid. The franchisor may
not be legally obligated to force the
customer to pay, but if the franchisor
sues for payment, you may have to pay
the legal costs.
- Personal guarantees.
Many franchisors require franchisees to
personally guarantee the obligations of
the franchise business. This means that
if your business assets don't cover your
franchise obligations, you could lose
personal assets, like your home or car.
- Anti-competition rules.
You and your immediate family (your spouse
and children) may not be allowed to have
an ownership interest or perform services
in another cleaning business, even if
your family members don't have an ownership
interest in your janitorial franchise.
This restriction may continue even after
your franchise ends.
The FTC's Franchise
Rule
By law, a franchisor must
give you a detailed disclosure document.
The disclosure document should include:
- the total number of franchises, and
the number of franchises terminated or
not renewed during the previous year;
- the bases and assumptions for any claims
about potential earnings or the earnings
of existing franchisees;
- the cost of starting and maintaining
the business;
- the names, addresses and telephone numbers
of at least 10 franchisees who live closest
to you (names, addresses and telephone
numbers of at least 100 franchisees is
required in some states, including Maryland)
;
- the background and experience of the
franchisor's key executives;
- a fully audited financial statement
of the franchisor;
- any lawsuits against the franchisor
or its directors by franchisees; and
- the responsibilities you and the franchisor
have to each other once you've purchased
the franchise.
You should receive the
disclosure document at least 10 business
days before you pay any
money or legally commit yourself to buying
a franchise. Ten business days should give
you enough time to review the document,
get answers to your questions, talk to franchisees
and get advice from an attorney, accountant
or business advisor.
Protect
Yourself
Buying a franchise is
a big decision. Before you commit, take
the following precautions:
- Read the company's disclosure
document. Review it carefully
to learn more about your obligations,
the litigation history of the franchisor
and failure rates. This information will
help you decide whether franchisees are
dissatisfied with the franchise.
- Talk to other franchisees.
Don't rely only on the information the
franchisor gives you. Talk to current
and former franchisees about their experiences
with the franchisor. Their names, telephone
numbers and addresses should be in the
company's disclosure document. The franchisor
may refer you directly to franchisees
who are known to be successful. Don't
rely on references the company selects.
- Contact your state franchise
administrator. If you live in
California, Hawaii, Illinois, Indiana,
Maryland, Minnesota, New York, North Dakota,
Rhode Island, South Dakota or Virginia,
your state has an office that regulates
the offer and sale of franchises. Contact
your state franchise administrator before
you invest. Ask if the franchise you're
considering is registered to offer franchises
in your state. If you live in Maryland,
call the Maryland Attorney General's Office
at (888) 743-0023, or visit www.oag.state.md.us.
If you live outside of Maryland, you can
find the name of your state franchise
administrator, by calling the North American
Securities Administrators Association
at (202) 737-0900 or visit www.nasaa.org.
You also may contact your state Attorney
General (www.naag.org)
or Better Business Bureau (www.bbb.org)
for more information.
- Get all promises in writing.
If a salesperson tells you that the franchisor
will give you accounts near your home,
but the written agreement defines the
geographic area more broadly, it's what's
in the written agreement that counts.
If a provision in the agreement is different
from anything you discussed with the salesperson,
demand that the written agreement be changed.
If a salesperson tells you that you should
be able to make $12 to $15 an hour, make
sure that prediction is included in the
disclosure document. If the salesperson
or franchisor won't agree, walk away from
the deal.
- Review the franchise agreement
carefully. It's important to
understand all the conditions of the agreement.
It controls your relationship with the
franchisor. Make sure the agreement spells
out the details so there are no surprises.
- Understand your obligations.
As a franchisee, you may have to pay royalties
and other fees. Find out exactly what
types of fees you'll have to pay, how
much you'll pay and how often.
- Investigate claims about potential
earnings. The estimated value
of the package of accounts you buy may
not reflect the income you'll earn from
servicing those accounts. Find out how
the company assigns a value to the accounts.
Ask how many franchisees made the represented
income and where those franchisees are
located.
- Be cautious when financing.
While financing your purchase through
the franchisor may seem appealing, the
terms of the financing agreement may not
be the best deal for you. For example,
you may have to sign a note to secure
the debt and agree to terms that could
make it tough for you to sue the company
if you wanted to cancel your agreement.
Before you agree to franchisor financing,
be sure you understand all the terms of
the deal.
- Consider getting professional
advice. Ask a lawyer, accountant
or business advisor to review the disclosure
document and franchise agreement. The
money and time you spend on professional
help may save you from a bad investment.
For More Information
The FTC also publishes
a series of consumer brochures on franchising
and business opportunities. For free copies,
contact the Consumer Response Center, Federal
Trade Commission, Washington, DC 20580,
1-877-FTC-HELP (1-877-382-4357), TDD: (202)
326-2502, www.ftc.gov.
The State of Maryland
also publishes investor brochures about
franchises and business opportunities. For
copies, or for more information about Maryland's
requirements regarding the sale of franchises
and business opportunities, contact the
Office of the Attorney General, Maryland
Securities Division, 200 St. Paul Place,
Baltimore, MD 21202, (410) 576-6360, www.oag.state.md.us,
email: [email protected].
Glossary of Terms
Disclosure Document
- A written document that outlines the general
franchise offering, including background
information of the franchisor, a summary
of the franchise agreement, and a list of
current franchisees.
Franchise Agreement or
Franchise Contract - The
written document that spells out the legally
binding obligations between the franchisor
and the franchisee.
Franchise Fee
- The purchase price for the franchise.
Franchisee
- Any person who buys or invests in a franchise.
Franchisor
- Any person who sells a franchise.
Management or
Service Fee - A fee paid the franchisee
for extra or ongoing support, such as providing
additional or substitute accounts.
Royalty Fee
- A specific payment made by the franchisee
for the right to use the franchisor's trademark.
In most instances, the franchisee pays this
fee throughout the term of the agreement,
regardless of anything else the franchisor
may or may not do.
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