How to Research a Franchise
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Sell skin-care products or own a hotel. Groom dogs, help people lose weight or do their taxes. These are just a few of the opportunities in today's franchise world, which includes a boggling variety of concepts selling every imaginable product and service. How do you know which one you'd truly enjoy? How do you know which one represents the best business opportunity?
Franchisors can dazzle prospects with glossy brochures and slick presentations, but you'll need to get beyond those to the hard facts about their offer. To help, we assembled a panel of experts and asked them to identify the key questions you should ask and the best ways to get franchisors and franchisees to tell you what you want to know.
Once you identify a brand you're curious about, start by requesting and thoroughly reading the Franchise Disclosure Document, or FDD, that each franchisor is legally required to provide to prospects. If you don't understand everything in it, have a franchise attorney or consultant explain the terms.
Then you're ready to start talking to franchisors. If he could only ask a franchisor three questions, Jeff Elgin, CEO of franchise consulting firm FranChoice, says they would be:
- What's your number-one focus? "The answer you want is 'the success of our franchisees,'" says Elgin. "But I've gotten: 'Our number-one focus is our own bottom line.' That would concern me."
- Why do franchisees get in trouble? Try to identify exactly what's going wrong for troubled franchisees, Elgin says. If the franchisor says, "They didn't follow the system," press on by asking in what way. "You want to learn where the pressure point is," Elgin says. "What is the difficult thing to do successfully in this system?"
- How are conflicts resolved? Ask franchisors for details of a recent franchisee conflict and how it was resolved. You'll learn a lot about the franchisor's respect for franchisees and its commitment to making them successful, Elgin says. If the franchisor says there's never been a conflict, be skeptical. "If it has more than three franchisees, it has had a conflict," Elgin says.
One more thought: Prospects should ask franchisors which skills their franchisees need most, says Joel Libava, president of consulting firm Franchise Selection Specialists Inc. At many franchises, the most successful franchisees have similar skills--they are mostly former marketing executives or sales managers. See if you fit in to their winning group.
Watch for red flags
When you're talking to franchisors, keep a sharp eye out for potential problems, from weak managerial skills to outright scams. Be sure to look at the resume of the franchisor's top management, says Joe Mathews, co-author of Street Smart Franchising and co-founder and principal of The Franchise Performance.
"Often, the people making the decisions have never owned a small business before," he says. "They have big-business goggles on, and they tend to make ivory-tower decisions."
Be worried about franchisors who take you aside and make earnings claims that differ from what they've stated in Item 19 of their FDD. It's illegal for them to say anything more on the topic. If they skirt this rule, you should be worried about their ethics in general, says FranNet consultant Gordon Dupries.
If a franchisor is overly enthusiastic about signing you up without hearing much about your qualifications, that's another warning sign. Good franchisors are selective, searching for the best-qualified candidates who possess the skills and capital needed to succeed.
"You want companies that award franchises," says Dupries, "not sell them."
Ask the franchisees
Once you've thoroughly grilled the franchisor, you're ready to chat up franchisees. After establishing a rapport, you'll want to ask hard questions--but in ways that the franchisee will feel comfortable answering. Again, Elgin has three questions in mind:
- How well prepared were you when you opened? This question covers many bases, from how forthcoming franchisors were to the thoroughness of their training program. If franchisees report that they were well-prepared and that things went smoothly, that's a good sign. Unpleasant surprises or unexpected problems likely point to weaknesses in the franchisor's support for its franchisees.
- How effectively do the marketing programs bring customers to you? Franchisors love to talk about the brand and building value. "But what you need to know," says Elgin, "is whether customers will be coming in and spending money in your unit." The answer you want? "From the minute we opened, we were crowded."
- What is the financial reality? Nail down as many financial details as you can with the franchisees, Elgin says. You may have to ask several different franchisees to get all your questions answered. How much does it really cost to open a unit? How soon can you start making money? How much can you expect? Only franchisees can give you the real story.
To get the best results with franchisees, don't waste their time, says Dupries. Let the franchisees know you've learned a lot about the brand already. Present yourself professionally, as a serious prospect. "The more they feel you're a heartbeat away from signing," he says, "the more information you will get."
There's another reason for making a good impression on franchisees. Often, Dupries says, franchisors will follow up later by calling the franchisees you interviewed to ask them what they thought about you.
When you're talking to franchisees, remember to consider their point of view, which may influence what they tell you. For instance, if you're talking to a franchisee near the territory you want, he may tell you business is awful because he wants the territory you covet to remain open to lessen his own competition or so he can purchase it later. Or some franchisees may brag about their success because they're too proud to admit they're really in trouble. Ultimately, Dupries says, you'll have to use your gut instincts to decide whether a franchisee is being truthful.
If possible, try to spend an entire day with at least one franchisee. Mathews says that's the only way to find out how franchisees spend their time and what they're doing to be successful. It also gives you more time to build a relationship with the franchisee and hopefully get more honest and detailed answers.
Mathews also advises asking franchisees how many of their ideas get implemented. The answer to this question will vary from franchise to franchise--some have very top-down management styles, while others encourage franchisee feedback and actively incorporate ideas from the field. If the franchisor isn't very receptive to feedback, you have to decide whether you'd be happy in a cookie-cutter format or you'd prefer a system in which you can be more entrepreneurial.
There's a bottom line to being a franchisee, Libava notes. You're giving up a portion of your sales in royalties to the franchisor in exchange for its help running your business.
"What you need to know from franchisees in the end," Libava says, "is what the franchisor does that makes it worth the fees."
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