Source: http://www.psmag.com/navigation/business...

For many Americans, owning a franchise seems like a starter kit for being your own boss as a small-business owner. You have the benefit of riding on a well-established national brand, and all you have to do is manage the shop. But a 1997 study by Timothy Bates, an economist at Wayne State University, concluded that “entering self-employment by purchasing an ongoing franchise operation is riskier than alternative routes.” A 2007 study commissioned by franchisors found that franchisees had higher failure rates on Small Business Administration loans than non-franchisees. If everything goes right for a fast-food franchisee, he might enjoy a profit margin of about 10 to 12 percent, but a profit margin in the single digits is far more common. By contrast, at the corporate level, McDonald’s enjoys a profit margin around 20 percent.

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Franchise agreements usually require the franchisee to purchase food and other items only from authorized vendors. This helps to maintain consistency in quality. But, as Robert Zarco, a Miami-based franchisee attorney, points out, there’s more to it than that. Vendors can get picked because they offer a rebate to the franchiser. So if you’re a franchisee of, say, a pizza chain, you might find yourself overpaying for tomato sauce, only to see your overpayment make its way into the pocket of your corporate overseer. Yet as long as the rebate is disclosed, it is not, in the eyes of the law, an illegal kickback. More than one o