Analyzing A Franchise
Much of the information you'll need to gather in order to analyze a franchise will be acquired through the following:
*Interviews with the franchisor
*Interviews with existing franchisees
*Examination of the Uniform Franchise Offering Circular (UFOC)
*Examination of the franchise agreement
*Examination of the audited financial statements
*An earnings-claim statement or sample unit income (profit-and-loss) statement
*List of current franchisees
*Newspaper or magazine articles about the franchise
*A list of the current assets and liabilities.
Through this research, you want to find out the following:
1. If the franchisor as well as the current franchisees are profitable. How able is the franchisor to stay in business? After all, if the franchisor is not making a profit, there probably won't be any help later on when you have problems.
2. How well-organized the franchise is. You don't have to know anything specific about the business to know whether or not a franchise is well-organized. If you go into a franchise outlet or the franchisor's company stores and see that the employees aren't well-organized and don't seem to know what they're doing, then that's not a business worth buying.
3. If it has national adaptability. You want a franchise that will grow nationally so that it will increase your business locally.
4. Whether it has good public acceptance. While it's good to have a certain amount of newness, you don't want to be in a business that's so radical you're going to risk your entire life savings on whether or not people are going to accept that idea or concept. Many times, you can feel that you are on the crest of a wave of a new concept, and you see that it's taking hold everywhere. But if the concept is not tried and proven, be very cautious.
5. What is its point of difference or unique selling proposition? You won't have much success if you try to open just another version of many existing businesses. There has to be something different about the franchise. A franchisor who has some point of difference over other businesses is a much better buy, because that point will set you off from other people.
6. How good the financial controls of the business are. You want the franchise to be backed by a franchisor with strong financial management ability so you can determine exactly what the financial health of the franchise is at both the corporate and unit levels.
7. If the franchise is credible. The franchise should have a good track record. That doesn't mean it has to have been in business for 10 years, but there should be enough of an operating history to show that this is a viable concept. This includes a good credit rating. If the franchise is in financial trouble, it will show in the credit rating.
8. What kind of exposure the franchise has received and the public's reaction. Find out if the business has had any write-ups in papers, and determine what the public's opinion of it is. You can find this out in trade journals.
9. If the cash requirements are reasonable. If you're getting into a business that promises a $20,000-a-year return to you as the owner/operator, it shouldn't have a $200,000 investment requirement. The investment should be in proportion to the kind of return that you will get as the owner/operator.
10. What the integrity and commitment of the franchisor are. This is very important. If the franchisor is willing to take your money without checking you out, that's a sign of trouble. The more particular a franchisor is, the more confident you can feel that the other people in the system are going to be good people as well.
11. If the franchisor has a monitoring system. This will allow you to know what your problems are and how you're doing so you deal with them more effectively.
12. Which goods are proprietary and must be purchased from the franchisor? Keep in mind that the franchisor generates profit by the sale of proprietary stock at a markup from the wholesale or manufactured cost. Determine which items are proprietary and must be purchased through the franchisor, and which ones aren't and can be acquired through outside vendors at a lower cost.
13. What the success ratio is in the industry. If eight out of every 10 businesses started in this industry fail, that's not a very high success ratio. Although franchises have a considerably low failure rate, they're not immune to bankruptcy.
Don't be shy about asking for the required materials from the franchisor. After all, they will be checking you out just as completely. If they aren't, that should sound a warning bell. Another warning sign is if the franchisor asks you to sign a disclaimer stating you haven't relied on any representations not contained in the written agreement. Such a requirement could indicate that the franchisor doesn't want to be held responsible for claims made by its sales representatives.
The franchisor could also be in bad financial trouble and willing to sell a franchise to anyone who comes along in order to produce a better cash flow. Or the company may not be very well-managed, and this could lead to problems in the future. Either way, a complete analysis will reveal any and all problems.