Investing in a Franchise

In reality you are taking your assets, which you own, and investing them in someone elses' brand and operating system. You will always own your assets. You will always own your corporation. But you will "do business as" (dba) a licensee of the franchisor.

Before You Select A Franchise...

Step 1: Evaluate Yourself

Your job is to make an informed business decision about whether a franchisor's business opportunity meets your needs and whether you can provide what the franchisor wants and needs in a franchisee.

You need to ask yourself basic questions:

What do you want from life at this time? What are your wants, needs, and desires? What are your goals, objectives, and dreams? What are you looking for in a business? Have you decided to leave what you are now doing, not just the job, but the profession?

Have you made a decision to become a part of another organization? Remember that in franchising you joined someone else's business. You are going to be using their marketing system to generate customers and their operating system to satisfy them.

Do you have the kind of personality that can accept running the business according to someone else's plan without feeling that it compromises your individuality? Do you have an interest in doing this kind of work for the length of the agreement? Have you ever worked for one company for five or ten years? Do you have related skills, knowledge, abilities, and work-related experiences similar to the ones required for running the franchise you are considering? Do you have the financial resources to open and operate the business successfully? Can the business support your lifestyle needs? Which of the franchises you are reviewing meets your financial needs short and long term?

Step 2: Evaluate the Franchise Opportunity

Evaluate the legal documents from a business perspective. Determine whether the franchisor has territory policies that might make franchisees less competitive in a highly competitive environment. Many prospective franchisees erroneously believe that having a large territory is best for them. It could, in fact, be the worst thing for them. For example, if you have too few franchisees in a market and competitors have more units than you have, it could leave you at a disadvantage in terms of dominating the market for your product or service in your area.

Look for a franchisor who can communicate a strategy not just for market presence but for dominating markets; look for a franchisor interested in establishing a competitive edge and increasing market share. If a franchisor cannot talk about these issues, it is entirely possible the franchisor is using franchising as a way to generate franchise fees and royalty revenue rather than to establish a competitive position in the marketplace.

Evaluate the marketing/advertising fee. Many franchisors and prospective franchisees erroneously believe that a low marketing fee is a good thing. In fact, the marketing fee should be related to the amount of money each franchisee needs to contribute to support an advertising campaign that will generate enough new and repeat business for each of them. A 1% advertising fee may look good now, but when you need 5% from everyone to be competitive, it might not be possible to convince all franchisees to participate.

Evaluate the effectiveness of the Franchise Advisory Council. Does the franchisor incorporate the franchisees' input in the decisions that affect the future direction of the system? Does the franchisor involve franchisees' input in decisions?

Be sure you can answer the question "How will I make money in this business?" There should be a very simple answer to this question. It will not violate earnings claims restrictions for the franchisor to answer it because you are not asking "How much money will I make?" You simply want to know how money is made in the business. Spend as much time as possible speaking to existing franchisees. Ask them if they would do it again. How long did it take them to recoup their investment? How much money are they making? Does the operating system work? Are they provided with good marketing programs? Do the franchisees get along well with each other and with the franchisor? What are the major problems with the business? Do they use all of the operating system? Is the franchisor's ongoing support adequate and helpful? The answers to these questions will help you make your decision.

Step 3: Evaluate the Franchisor's Business Plan

The franchisor should have a business plan for the system that covers at least the length of the agreement you are being asked to commit to. Ask for the plan for the market where you are going to locate the operation. Ask for their analysis of the competition. Ask how many units are being planned for your area and why that many. Why not more, why not less? Ask how much is going to be spent on marketing in your area.

Ask to look at the operations manuals or at least to see an outline of them. This is important because the operations manuals are your guideline to a successful operation. You need to feel comfortable that they are complete and clear and meet your abilities, needs, and goals.

Ask to receive a full explanation of the initial and subsequent training programs. Ask how people are trained. Is it classroom or hands-on practice? Are there case studies and discussions or is it straight lecture?

Ask for a full explanation of the pre-opening assistance offered by the franchisor. Understand any help franchisors give for site selection and lease negotiation. Be clear about what ongoing support the franchisor provides to the franchisees.

2.3: Preparing To Buy a Franchise

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