Preparing To Buy A Franchise

If you're reading this, you already know that franchising is a different business model. That it involves paying the franchisor an initial franchise fee, as well as ongoing royalties and, often, paying into an advertising fund. And that you're willing to pay those costs for the privilege of using a recognized brand name and an operating system with a successful track record. Not to mention the initial and ongoing training and support the brand offers.

All good franchisors will offer these things, but how do you choose which one to buy? And once you have chosen a brand, what are the things you must do to minimize the risk of your investment--often your life's savings plus whatever you're about to borrow?

You (The Franchisee)

First, let's look at choosing a brand that's right for you. While many variables play a role in choosing the franchise brand that fits, experience has shown passion is often the most important. If you love what you do, success is more likely (all other things being equal). And what are some of those other things?

  • How much money you're able or willing to beg, borrow, or steal
  • Job skills required for success (technical vs. people skills)
  • Hours of operation (business-to-business vs. late-night fast food)
  • How many units you want (single unit vs. many vs. area developer)
  • Your management style (hands-on operator vs. running a business)
  • A succession plan (have one in place before buying)

What is your personality/temperament? Are you better off working on your own, or with others? Do you like to set your own hours or show up at the same time every day? Can you obey a franchise system's rules, or do you need to chart your own course? Do you like managing people or being left alone to do what you love? And finally, are you willing to commit for the next 10 or 20 years?

Them (The Franchisor)

It's also critical to carefully examine the potential franchisor, and do your due diligence before signing on the dotted line. Have you spoken with other franchisees in the system? How are franchisor-franchisee relations? Is there an effective franchisee advisory council? Does the franchisor listen? Is the franchisor involved in litigation? How is the training program? What kind of support does the franchisor provide?

Go online to search among the many web sites where disgruntled current and former franchisees air their complaints. But don't place too much faith in the online complainers. Trust your own experience with the franchisor and the franchisees you speak with directly.

Is the franchisor open with earnings claims? Are they making promises that seem too good to be true, or are they being more realistic and stressing hard work, long hours, and following the system for several years before Easy Street even becomes a possibility?

The Industry

Even if you love 35-mm photography, the market today is demanding digital. Choose an industry with growth potential over the next 10, 15, or 20 years (the length of the franchise agreement you're likely to sign).

There are few guarantees in any business. You may run the best Taco Bell on the planet, but if people get sick at a Taco Bell halfway across the country, your sales will drop. Your job is to examine and minimize the risk. Some do this by choosing a relatively "safe" service industry such as haircutting, home cleaning or repair, or an automotive segment. Some bank on emerging fields such as elder care or home health services.

The market/competition

Is there a need for the product or service in your area? And if there is, has that need already been met by existing businesses? How big is the pie? One percent of a huge market is better than 20 percent of a smaller one. (Competition includes non-franchised businesses, too!)

Seek professional help

Buying a franchise will change your life--for better or worse. Yes, it is very much like a marriage (though not one between equals). So you need to protect yourself: it's probably the first time for you, but the franchisor has been around the block before--and has more lawyers and money than you'll probably ever see.

Most people don't do their own surgery or rewire their house. They hire professionals. While it may be tempting to be your own lawyer, spending the money up front for good legal help will save a lot of headaches in the years ahead. And choose carefully: the rules of the game are different in franchising, and not all business attorneys are equal. Find one who knows franchising.

Have an accountant run through your pro forma, examining financing requirements, predicted expenses, potential cash flow, and how likely the business is to fulfill your expectations or needs.

The same holds true for finding the right franchise brand. Many companies exist for just this purpose: counseling potential franchisees, with the better ones trying to find the best potential matches for both sides.

Financing, too, has a bevy of experienced lenders specializing in the franchise field. Options include the SBA, banks (some specialize in franchising), financing giants like GE Franchise Finance, and dozens of experienced smaller lenders who specialize in franchising. Franchisors can help directly, but don't count on that. More help often comes from walking into a bank with a recognized brand name in your pocket, rather than your own great (unproven) idea.

Help is available for free or at a relatively low cost from sources such as the Federal Trade Commission, franchise industry trade publications and web sites, and the International Franchise Association (IFA). The IFA's Franchise Opportunities Guide provides a list of franchise companies in more than 75 kinds of businesses for about $25, and its web site has articles on every aspect of franchising you need to know to get started. Trade shows are another great opportunity to meet real live franchisors--and franchisees--in the flesh, for the price of admission, with no obligation or pressure.

Above all, take your time. There's always another franchise bus coming along...

2.2: Preparing a Franchisee Business Plan
2.4: Investing in a Franchise

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