3 Keys to Finding a Great Franchise
- By all means, use the internet to gather information, but be a smart franchise consumer and see past the hype. Throughout this process, you must be prepared to ask tough questions. A couple of good resources to help you get started are the FTC's Consumer Guide to Buying a Franchise and the International Franchise Association publication Investigate Before Investing by Lewis G. Rudnick and H. Bret Lowell (go to www.franchise.org and click on "Books and Publications").
- Attend a franchise and business opportunity trade show. Shows come through most cities during the course of the year, and there's nothing quite like seeing the franchise marketplace in person. Before you go, find out which companies will be showing, dig out some basic information online about the ones that catch your eye and plan on visiting with them. Dress in business-casual attire, leave a personal business card with the representatives of programs that look promising, and encourage them to send you follow-up information.
- Part of choosing a franchise is knowing what you like and what you can afford. Write down your ideas for the kind of business you'd like to be involved in, and go over them with an advisor. Do your homework: Talk to family members, a good banker and an accountant with experience representing franchises. Everyone's situation is different; what kind of resources do you have? Don't waste your time kicking the tires of a business that requires a $600,000 investment if that's simply out of your financial neighborhood.
Red Flags, Green Flags
- Red Flag: You heard a pitch for a new business, and after 10 minutes, you just knew this was it-the perfect business for you. It may ultimately turn out to be the business for you, but you can't allow yourself to be pulled in by one sales pitch. There is no love-at-first-sight when selecting a franchise.
- Green Flag: You've visited a good selection of current franchisees, and they've given you favorable information about the franchise. Key questions to ask them: Was the training valuable? Do you enjoy the work? What are the strengths and weaknesses of the business? What were your gross sales last year? And the clincher: If you had it to do over, would you buy this franchise again?
- Red Flag: You've called on franchisees in the system, and they've uniformly told you the franchise is the biggest mistake they've ever made. They've even tried to dissuade you from it. The franchisees know the qualities of the franchise business better than anyone, and you should consider their independent views on the program. Always value the view from the trenches, especially if you're thinking about jumping into the trenches yourself.
- Green Flag: You've taken the franchisor financial statements included in the UFOC to an advisor, such as an accountant, and taken the franchise agreement to a good legal advisor, and they've both given you the go-ahead.
Dos and Don'ts of Closing the Deal
Do take your UFOC to an accountant and a legal advisor for review. It may seem like an unnecessary expense, but in a franchise transaction, these advisors will pay for themselves many times over.
Do think about the changes you and your attorney want to see in the franchise agreement. Prepare a short list of suggested changes or questions, and plan to discuss them with a decision-maker at the company. Most franchisors will at least consider your changes, and if your concerns are serious and important, they may offer an amendment or written comments of clarification. Some franchisors will simply tell you they won't make any changes to the contract-that it's a take-it-or-leave-it proposition. As a general rule, I've found that the younger the franchise program, the more willing it is to negotiate on the franchise agreement. It's the marketplace at work-younger companies are usually more eager to address your concerns and sell you a franchise.
Don't put off thinking about a location for your business. Even if you'll be running the business from a home office, think about the equipment you need and other demands on the home office. If you need to find a retail location, it's never too early to start that process. You may even want to complete your market research on a few locations before you commit to the franchise.
Don't close on the franchise transaction assuming that anyone is looking out for your interests just because others have been through the well-packaged process. It ain't so. Have a lawyer in your corner to make sure the document is in good order for your interests.
Don't overextend on the territory purchase. It's natural to want to secure as much territory as possible when buying a franchise, but it can quickly pull you into a debt struggle. One of my client's franchisees recently bought four territories (against the recommendation of the franchisor) because she wanted to own the entire city market, and she and her partner put down a large initial fee. They planned on an SBA-backed loan that didn't come through and quickly ran short of operating capital, jeopardizing their entire investment.
Are They Up in Arms?
Ideally, the relationship between franchisees and their franchisor should resemble a happy marriage. But lately, relations at some of the nation's biggest food-service franchises have been on the rocks.
Dairy Queen, Quiznos and Subway are among the well-known fast-food brands where franchisees have sued their franchisor in the past year. Complaints range from unreasonable requirements to deceptive recruiting to advertising squabbles.
Keep in mind while you're doing your research: Lawsuits will be listed in the UFOC, but they may not be up-to-date. And many franchisee battles are handled through negotiation, which means they can fly under the radar and may not be listed in the UFOC.
So how can you find out if there's a revolt brewing? You can call dozens of franchisees, or try a faster way: Look for a franchisee trade association. These kinds of associations are a growing trend, with the American Franchisee Association counting 15,000 members from a wide variety of franchise types.
The internet offers a wealth of ready information on franchisee gripes. For instance, details of the Dairy Queen franchisees' July 2006 lawsuit can be found at www.dqoa-dqoc.com. An August post contains 20 pages of letters between the Dairy Queen Operators' Association and the franchisor, International Dairy Queen.
Unhappy UPS Store franchisees state their case at www.thebrownboard.com, the site for The Brown Board Owner's Association. Postings include a chat forum, a store-owner survey and even letters from franchisees who oppose the Brown Board's viewpoint. The association has nearly 2,000 members.
Anyone wondering what has some Quiznos franchisees steamed can visit www.toastedsubs.info. The site lists previous and current lawsuits, offers six years of corporate-advertising expenditure reports, and has figures for how many planned new Quiznos stores fail to open within 12 months. There's also an information page aimed at prospective Quiznos franchisees.
It's crucial to learn upfront if franchisees are on the warpath, says C. Everett Wallace, co-founder of the National Minority Franchise Initiative in Durham, North Carolina. "It may be a great brand," he says, "but you really want to find this information out before you sign on."
Of course, you'll want to run anything you discover online about a franchisor back by the company's management, both to hear their side of the story and to verify accuracy.
Carol Tice is Entrepreneur's "Tax Talk" columnist.