Let's Get It Started
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
Surprise! Your franchise research doesn't begin with looking at franchises at all. It begins with a very thorough self-examination, because if we're going to find a franchise that's a good match for you, we're going to have to know a lot more about what you want and what resources you have to work with. The answers are inside you, but they may not be things you have carefully thought through and written down. The effort you put into this first section will save a considerable amount of time later in the process, so take your time and do a great job with these initial steps.
Step 1: We'll begin by answering the most basic question of all: Why do you want to own a franchise? Do you seek the freedom and autonomy of business ownership? Do you see franchising as a way to use your skills and experience to create greater personal wealth than you have been able to earn in corporate America? Do you have specific lifestyle expectations for business ownership? It's essential to have a clear idea of why you want a franchise and what you expect to accomplish by owning and operating one. Write down your answers in detail so you can refer back to them as you progress in your franchise research.
Step 2: Now that you know why you want a business, let's take a moment to make sure a franchise makes sense for you. Most people list the main advantage of a franchise as the reduction of risk, since you should select one with both a proven operational system and a good brand. Keep in mind, though, that there's a trade-off for this increased security. As a franchisee, you're required to operate your business in a specific manner (the proven operational system), and you need to be comfortable with the franchisor basically telling you how you're going to run your business. If you have a stronger entrepreneurial personality and want to innovate and fly by the seat of your pants, a franchise isn't a good choice for you. Before moving on in the process of becoming a franchise owner, make sure you're completely comfortable with the idea of executing someone else's system the way you're told.
Step 3: Let's spend a little time thinking about where you want your business to be located. Do you want to stay right where you are or relocate? If your ideal business is sold out in your first choice of location, will you accept a territory a little farther away? We're not looking for a specific cross street here--just a general market area. Many people find it helpful to determine a maximum driving distance or commute time that will identify potential locations of interest.
Step 4: Now it's time for us to form an opinion about that four-letter word that starts with an "s": sell. In many franchises, the most important role of the franchisee is to hustle up business by selling to customers, so we need to determine where your comfort level is with regard to selling. Some folks are perfectly at ease cold-calling strangers or going door to door to solicit business. Others can't imagine doing any selling, except perhaps helping customers from behind a retail counter. Most fall somewhere in the middle. Rate your comfort level with sales activities on a scale of one to 10.
Step 5: We also need to determine your comfort level with managing employees. Most franchises have employees, but the number and characteristics of the employee base varies considerably. Will you be comfortable managing a large staff, or should you be focused on businesses with very few employees? Does it matter to you whether they're skilled workers vs. unskilled? Many franchises employ significant numbers of unskilled employees and manage in a high-turnover environment--is that a situation you could handle? Do you have any issues with businesses that typically hire young employees or those with a limited ability to communicate in English? This is an important step for you to think through--your answer may eliminate many franchises from your consideration.
Step 6: At this point, it's important to consider lessons from your past work experience and your general thoughts about any status or ego issues that may be related to potential businesses. What work have you liked doing the most and the least in your previous experience? What are your strengths? What are your weaknesses? What types of tasks do you never want to have to do again? What hours of the day and which days of the week do you want to work? Finally, how important is it to you what the neighbors might think? In other words, if you found a business that was perfect in every way in terms of meeting all your goals but it happened to be a service franchise where your employees were involved in cleaning drains, toilets or what have you, would that be an issue? The fact is that a lot of very successful franchises aren't glamorous except in their results, and you need to decide whether to consider such opportunities.
Step 7: It's time to rate your financial situation. Make a list of the current value of all your assets (things you own) and all your liabilities (things you owe). When you subtract the liabilities from the assets, the difference is your net worth. Carrying this process one step further, you need to determine the current value of all your assets that are either cash or can be converted to cash fairly easily (including assets such as stocks and bonds, retirement programs and home equity). This cash or cash-equivalent number is called your liquidity or liquid assets. You'll need to know this and your net worth when buying a franchise.
Step 8: Now it's time to organize the information we've gathered in the preceding steps into a format we can use to evaluate potential opportunities. You need to create a narrative for yourself that defines the most important characteristics you want in a franchise. Take your time on this, because we're going to be referring back to your narrative a number of times, and this is critically important to ensuring that you make a good decision.
Here's a fictitious example of such a narrative: "My ideal franchise would require a total investment of no more than $250,000, with financing available for at least $150,000 of that total. I want my business to be located within 40 miles of my current residence. I am completely comfortable with any level of selling activity required of me to promote the business and with supervising a reasonably small number of employees, as these are the biggest strengths I bring to the business. I am interested in looking into any franchise that meets my financial goals, regardless of its product or service. I am more interested in long-term financial goals than I am in a quick return on my investment, so I can go a year before the business reaches the break-even point, as long I could see a profit of at least $100,000 by the third year. I would be willing to work whatever hours are necessary during the first year, but would like to have the ability to enjoy more time traveling with my family thereafter. Ultimately, I would like to sell my business after about 10 years for a substantial profit and retire from work activities."
Step 9: This one is easy--or is it? Step 9 is to keep an open mind. Our goal here is to try to find the franchise that's perfect for you out of thousands of possibilities. You've taken the time in Step 8 to consider and list the characteristics that define this perfect match for you. You need to make sure you don't let any preconceived notions or prejudices steer you toward some concept that doesn't match your list or turn you away from some concept that does. Congratulations! You've completed what for many is the most difficult part of the franchise selection process--though undoubtedly the most important. Now it's time to get busy narrowing down those thousands of companies into a more manageable list of potential opportunities for you.
Part 2: Narrowing Down the UniverseThe simple fact of the matter is that you'd spend the rest of your life trying to research the thousands of opportunities that exist in franchising. So the purpose of this section is to use some effective techniques to rapidly eliminate most of them from consideration--based completely on the work you did in Part 1.
As we get into this process, keep in mind that our goal is indeed to rapidly eliminate almost all concepts from consideration. We're starting with thousands of possibilities and we want to get down to one. We need a few fast tests to make most of them go away quickly.
Step 10: Decide if you want to continue this process on your own or get assistance. You can get help at any time, but it's best to decide immediately after you complete the personal evaluation whether you want to. Here's the scoop: Consultants at companies such as FranChoice specialize in helping you perform a self-evaluation, then narrow down opportunities to find a few that match whatever you're looking for. Their services are free to the consumer (the consultants are paid by franchise companies for providing the service), and they can save you considerable time and effort if the consultant is professional and effective. The following steps, however, assume that you want to conduct the process on your own.
Step 11: Establish the maximum investment criteria. Let's say you identify your maximum investment level as being $100,000. Making that one decision eliminates more than 80 percent of all franchise opportunities. Whatever amount you decide is right for you, just put it on the top of the list, since we don't need to spend any time at all on franchises that are above your level of investment.
Step 12: Establish the employee criteria. Let's say you don't want any minimum wage employees--again, that would allow you to quickly eliminate a majority of franchise opportunities. If your answer on this step is that anything related to employees is fine with you, then we just won't use it as an initial screening mechanism.
Step 13: Establish the selling aptitude criteria. If you aren't comfortable doing any selling other than waiting on customers from behind a counter, that allows you to eliminate most service-related franchises.
Step 14: Establish the hours of work criteria. One axiom for success as a franchisee is that you want to be at the business at whatever time the cash register is ringing the loudest. Assuming this is true, refer to your preference on the hours and days of the week you want to work. If you don't want to work evenings or weekends, that's going to allow you to eliminate many or even most retail businesses.
Step 15: List these four criteria that you've established on paper for easy reference.
Step 16: Look at industry segments first rather than individual companies. The four criteria you identified in the previous steps should allow you to quickly narrow down the total possibilities by 95 percent to 99 percent. Rather than looking at thousands of individual companies, you can use sources that have sorted all these companies into no more than a couple of hundred industry segments. With the exception of catch-all segments such as "other service businesses," you'll find that virtually every company in each industry segment is going to have the same basic characteristics as the others. For most industry segments, if you find that the first company listed doesn't meet your elimination criteria, none of the others will either, so you can skip over the entire segment.
One of the best sources of information on franchise opportunities organized by industry segments is Entrepreneur's Franchise 500®. You can easily scan through the entire listing by industry segment in a few hours. The Franchise 500® also lists individual companies for any segment that might be appropriate for you. See the listing at entrepreneur.com/franchise500.
Step 17: Do an initial scan, looking for completely obvious financial eliminations. If, for example, all the hotel chains have investment levels of over $1 million, and your maximum investment potential is $100,000, you don't need to spend any more time on that category--just cross it out and move on. Skip over any catch-all categories for now, too.
Step 18: Do a second scan of all the segments and think about the employee situations in those businesses. Figure out if they're complete disconnects with what you want. This shouldn't take more than a few seconds for most of the industry segments--again, just skip over any catch-all categories.
Step 19: Take a third look at the remaining industry segments while thinking about your selling aptitude and hours of work criteria. This may take a little more time than the first two elimination steps, and it's possible that you might not know the answer to one or the other without more investigation. That's fine--if you're not sure about a segment, don't eliminate it for now.
Step 20: Go back and look at each company in the catch-all categories, repeating Steps 17, 18, and 19 for each one. Cross off any eliminations you can make on a company-by-company basis.
Step 21: Now go back and review the remaining possibilities one last time. At this point, take time to really think about the industry segment or company. Do you have any status issues? Do you have any other considerations that might eliminate these as possibilities? If so, eliminate the concept or group and move on.
Step 22: Make a list of the industry segments and/or companies that made it this far. Split the list into two categories: ones you're sure meet your initial criteria and ones you need more information on.
Step 23: Do some quick research on all the industry segments on your second list. Look for the answers to any outstanding elimination criteria questions so that you can either move the industry segments to the first list or get rid of them. You can usually find what you need to know on the internet by searching the first couple of companies listed in the category. Follow this process until everything on the second list has either been moved to the first list or eliminated. As a general rule of thumb, at this point you should have narrowed down the franchise universe to a playing field consisting of a few industry segments (no more than 10).
Part 3: Narrowing the Playing FieldThe further we go in this process, the more time-consuming it becomes, so we want to be as efficient as possible in further narrowing down the list. We're now going to try to identify representative companies in each remaining segment to decide whether to go further with the entire segment.
Step 24: Pick a representative company to examine. Let's say one of your remaining segments is fitness businesses, and you had identified from your source data that there were at least 25 different franchise companies in the segment. What you need to do now is pick a company you think should be representative of the segment. Here are two good criteria for selection: 1) Assuming the list you're working off of has company growth data, pick a company with strong growth compared to its peers, and 2) if there is an 800-pound gorilla in the segment--a company that's way bigger than the others--don't pick that one; it may not be a realistic sample of the current growth potential possible for you.
Step 25: This is your initial company target list. Go to the website of each of the representative companies you've selected and take the time to carefully review their information. Remember, what you're looking for at this point is anything that turns you off about the segment, so it can be eliminated. Assuming you don't find any such negative information, fill out their request-for-information form, because it's finally time to start talking to franchisors.
Part 4: Basic Franchise Company Research
The process of looking into any franchise opportunity is primarily one of mutual elimination. Just as you don't want to waste your time on a franchise that isn't going to work for you, franchisors don't want you to waste their time, either. Consequently, while you're asking them for information, they're going to be asking you for more information about yourself. The following steps are typical of this back-and-forth process.
Step 26: You submit the initial request for information to the franchisor, most often online. At this point, most franchisors will use some form of automated response to try and determine if you're really interested--and even qualified. About 95 percent of internet inquiries received by franchisors aren't qualified, so franchisors typically create an additional screening process, usually in the form of an auto-reply e-mail. To move through this stage more quickly, type one or more questions into the comments section of the inquiry form (for example, ask if your desired territory is available), since spam never includes additional questions.
Step 27: Once your validity has been confirmed, the franchise company should provide you with a fairly broad overview of information about the opportunity, along with a request that you fill out a questionnaire. The information you receive may be in the form of brochures, videos or additional web-delivered information. Most franchisors' questionnaires are basically the same and consists of 1) your contact information, 2) your professional experience, 3) your financial qualification information, and 4) questions about why you want to become a franchisee and what you hope to accomplish by doing so.
Step 28: After the franchise company receives your questionnaire, it'll evaluate your answers and decide if there's a possibility for you to do business together. If there is, the company usually ramps up to a fairly intense process of communication designed to provide both parties with all the information they need to make an informed decision about whether or not to work together.
Step 29: As you go through this process with each franchise company, you should be constantly evaluating the relationship as well as the actual information you are receiving. This process is much like courtship and will provide you with many clues as to how the "marriage" is going to work, if things get to that point. If you find the company to be very responsive and helpful, that's great. If, however, you find it to be unresponsive or uncooperative, get away, unless you want to end up spending years being treated in such a manner.
Step 30: At some point, the company will provide you with its official, FTC-mandated Franchise Disclosure Document. This contains a great deal of information about the history of the company and its key employees, any litigation or failure history for the chain, costs associ-ated with the franchise, training available for franchisees, a list of existing franchisees and perhaps even earnings information about existing units in the system (although this isn't required). You should read this entire document carefully, and make sure all the questions you have about it are answered in full.
Step 31: Assuming you've gotten this far with a company and are still interested, the next step is to call existing franchisees. You want to find out how they feel about the com-pany and the business. How are they doing financially? What's their day-to-day routine like, and what skills have they needed to succeed? What are the biggest pluses and minuses of being a franchisee of this company? What challenges have they had to overcome that they weren't expecting? Knowing what they know now, would they still do this? You should also tell them what you want to accomplish by owning a franchise and ask whether they think you can do so with this opportunity.
Step 32: Carefully analyze any required marketing program--what it is, what it costs, and most important, what the franchisees currently paying for it think of it. This is one of the biggest sources of value (or conflict, depending on the system) in franchising, so dig in to it until you have the answers.
Step 33: Confirm that the existing franchisees feel that the franchise company adequately protects them from internal competition. Some franchise systems place too many units too close together, and franchisees' businesses may be cannibalized. Encroachment may not be an issue, but make sure you check.
Step 34: If you expect to get financing for part of your franchise operation (which is fairly typical), ask the franchise company what plans or programs it has in place to help you do so. You should also ask existing franchisees how they obtained financing so you can get a good feel for whether this will be a challenge for you.
Step 35: Develop a strong sense of how well the franchisee training programs prepare you to operate the business. The most important existing franchisees to visit are those who have just started up in the past year or so, since their information and opinions are more likely to be relevant to your situation.
Step 36: Most of the companies you look into will be eliminated either prior to or at the point of contacting existing franchisees. That's good. But if you're still interested in an opportunity after Step 31, you might just have a winner on your hands. At this point, you may want to take some time to look more closely at the other companies in this industry segment. Go to each of their websites and see if one or more manage to catch your attention. If you want to learn more and compare them to the representative company you've been researching, start at Step 26 with each.
Step 37: After making a few calls to existing franchisees, you need to compile a list of questions for the franchisor based on the franchisees' feedback. You should be especially aware of any franchisee comments that seem to contradict the information you're getting from the franchise company and make sure to clear them up.
Step 38: After asking the franchisor to answer all the questions on your list and explain anything that isn't clear, make more calls to other existing franchisees to verify the answers you received.
Part 5: The Short Strokes
Once you get to the point with any franchise company where you've completed all these research steps and you're still interested, you're just about done finding a company to help you accomplish your goals and dreams of business ownership. Although we're almost done, there are still some key issues we have yet to address.
Step 39: Get out the narrative you created way back at Step 8 and make darn sure that everything about this company matches up with what you decided you need to have. Don't let yourself be talked into something that isn't going to get you where you want to be!
Step 40: Make sure you've covered everything with your spouse, if you have one, and that he or she is completely onboard.
Step 41: Try to call at least a couple more employees of the franchisor (other than the sales staff) to get a feel for their attitude. The operations or marketing staff working with new franchisees or the CEO would be best.
Step 42: Take a look around the territory you're interested in. Are there competitors, and if so, how do they seem to be doing? This will give you a final confirmation about the viability of the territory you're considering.
Step 43: Recognize that any anxiety you might be feeling is a completely normal part of this process. If you're like most people, you're leaving your comfort zone by purchasing a business, so you're going to feel fear about making the decision. Once it's made, the anxiety will turn into exhilaration!
Step 44: Examine the actual franchise agreement. Carefully read it and make sure any questions you have are completely answered. The FTC requires that these agreements be written in understandable English rather than "legalese," but you should still make sure you understand each of the provisions that govern your contractual relationship with the franchisor.
Step 45: Ask the franchisor if the franchise agreement is negotiable. Most good franchise companies will not negotiate their agreements, but if it is negotiable, hire a good franchise attorney to assist you.
Step 46: Consult with outside advisors, including accountants and attorneys, who can provide information you need to make this important decision.
Step 47: Visit the franchisor in person. Meet the officers and the people who will be directly responsible for supporting your efforts, and make sure you feel completely comfortable with each one of them. Take your spouse or an advisor along to get a second opinion if you have any doubts at all.
Step 48: Review all your notes and make sure all your final questions are answered and that no outstanding matters need to be addressed before you're ready to make a decision.
Part 6: Making a Decision
Step 49: It's time to do one last double-check of what's most impor-tant to you in making a good decision. Take a final look at the narrative you created in Step 8 and ask yourself, "Seriously, does this business provide everything I need to reach my goals?"
Step 50: If the answer to Step 49 is yes, then buy the franchise immediately. Though it's possible to hunt forever and perhaps find something that's even better for you than this one, it's unlikely. If it has everything you need, get onboard and get going so you can start enjoying the fruits of success as soon as possible.
Jeff Elgin is Entrepreneur.com's "Buying a Franchise" coach and has more than 25 years of experience in franchising, both as a franchisee and a senior franchise companyexecutive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumerslooking for a franchise that best matches their needs.