Buying a franchise is more complicated--and riskier--than just picking a famous brand and writing a check. "This is a decision that is going to require a significant investment of time and money," says Mark C. Siebert, CEO of franchise consultancy iFranchise in Irvine, Calif. "To be successful, you need to find something you can be passionate about--to find something that you’re going to enjoy doing. Getting into a franchise is a life style decision." But how do you start narrowing down the overwhelming number of franchise opportunities to find the perfect one for you? We consulted several top experts in the field and boiled down their advice to these 10 essential steps.
1. Start with yourself. Siebert says the process begins with some self-examination. You need to ask yourself what your business strengths are and what types of business activities you really enjoy, he says. At the same time, identify your weaknesses and what you don't like to do. Ask yourself some key questions, he says. What kind of lifestyle do you want this business to support? How much money do you need to earn? What hours do you prefer to work. If you have trouble dragging yourself out of bed in the morning, a coffee franchise where you need to report at 5 a.m. may not be the best choice. "Some franchise concepts may require you to be very sales oriented and if you're not a sales oriented person, you may find it's not a good fit. Make sure that you understand exactly what it's like to be that franchisee," says Siebert.
2. Do your homework. Narrow the choices down to a few industries you are most interested in, then analyze your geographic area to see if there is a market for that type of business, advises franchise consultant John Macaluso, co-founder of The Franchise Expert in Newport Beach, Calif.
Websites That Can Help
American Association of Franchisees and Dealers. A national nonprofit trade organization representing the rights and interests of franchisees and independent dealers throughout the United States.
Canadian Franchise Association.This association represents more than 500 franchise companies throughout Canada.
International Franchise Association. The IFA is a membership organization of franchisors, franchisees and suppliers.
American Bar Association Forum on Franchising. Find information here concerning the forum, its programs and publications.
FTC Franchise & Business Opportunities. Get information here regarding franchise law, as well as tips on business scams.
You can work with a franchise consultant like Macaluso, or contact all the franchise companies in those fields and ask them for information. Any reputable company will be happy to send you information at no cost. At the same time, do your own detective work. Search online to find all of the information you can about the company you're considering. Also check with the consumer or franchise regulators in your state to see if there are any serious problems with the company you're considering. If the company or its principles have been involved in lawsuits or bankruptcies, try to determine the nature of the lawsuits: Did they involve fraud or violations of FTC regulatory laws? To find out, call the court that handled the case and request a copy of the petition or judgment.
3. Check the money, honey. Franchise investment can range from a few thousand to tens of thousands of dollars, based on a variety of factors, so crunching the numbers is also critical, Siebert says. Look at all investment costs, including upfront outlays, monthly franchise fees, advertising contribution and royalties. Work with your accountant and your best estimates of the future of your business and your industry. Then, look at the capital you have available for investing. Be sure that the projections you make include enough money to support you and your family for the period of time necessary until the business becomes profitable, adds Macaluso.
4. Understand your rights. Fifteen states regulate franchise sales, in addition to FTC oversight. Franchisors are required to make available to prospective franchisees the company's Uniform Franchise Offering Circular. It's important to carefully examine this legal document, as it includes details about the franchisor's finances; fees, royalties and other costs; information about patents, trademarks and copyrights; obligations of the franchisor, and a variety of other pieces of information about the company. Siebert is routinely surprised by the number of prospective franchisees who do not take the time to read every document from the franchisor.
5. Get outside counsel. Find an attorney, accountant, or consultant who specializes in franchise matters, says Siebert. These counselors have seen the different kinds of issues that can arise and don't have the emotional investment you have in the deal, he says. They may be able to spot areas that you've overlooked or which expose you to more risk than is wise. "Speak to brokers or others in the marketplace, but make sure that you get a lot of different opinions from people other than yourself who can play devil's advocate for you in this process, so that you're not going in there and making a purely emotional decision," he says.
6. Talk to franchisees. The franchisor must also provide names and contact information for other franchisees--and you must make those calls, says Ford R. Myers, president of The Franchise Alliance in Haverford, Pa. Conversations with existing franchisees can give you invaluable information about the actual experience of working with the company and the true impact of the brand's advertising efforts.
Siebert agrees. Some of the questions he suggests that prospective franchisees ask include: Do the franchisors deliver on their promises? Are they providing you with adequate support? Did your investment fall in within the range that is listed in the disclosure document? Are you happy with your current returns? How much money are you making? Do you feel good about the decision that you made? I would ask specific questions specifically to that business. What am I doing on a day-to-day basis? Tell me what my day is going to be like. What skills do you think that I need to have in order to be successful in business? These may seem intrusive, but Siebert says most will be happy to share the information.
7. Meet the management team. Myers says it's important to become acquainted with the franchisor's management team in person, preferably at their headquarters. This will allow you to see the entire operation and get to know the people who will be providing you support services. The look of the office and the attitudes of the people working there can speak volumes about the company itself. "You want to have lengthy conversations with them" he says. "You're marrying these people. You have to look them in the eye and like what you see."
8. Make careful projections. Develop a pro forma profit-and-loss analysis that includes how much you would have to sell to make the royalties and other costs worthwhile. Revenue flows from different areas in different franchises, so it's important to understand where the money will come from--and what needs to be paid.
Nathan Smith, 44, a franchisee of Fastsigns, a national sign and graphics chain, says one reason he chose the Idaho Falls, Idaho-based company is that its only revenue comes from franchise fees and royalties--not from markups on suppliers' goods. In addition to his initial investment, Smith pays a royalty of 6 percent of sales as well as an advertising fund contribution of 2 percent of sales. But he's free to find his own sources for various jobs and makes use of the franchise's online network of more than 400 franchisees who frequently share information and resources to help one another. And in the end, that kind of banding together is one reason why so many independent businesses are attracted to franchises.
9. Have a plan. Franchise consultant Jeff Elgin, CEO of FranChoice, Inc. in Eden Prairie, Minn., says it's important to have a franchise business plan. For this kind of plan, the main sections include an Introduction, which includes a complete description of the business and the products or services involved; Management, which describes the key management roles in the firm; Marketing, which outlines how your franchise will promote itself to attract business; Financial Projections, including income and cash flow statements, as well as balance sheets that project anticipated financial performance; and Financing Needs, which outlines potential capital needs of the business in the period before it comes profitable or as it begins to grow.
10. Don't fall in love. Finally, says Siebert, many people buy a franchise based on emotion, without doing the proper research into the prospective market or the franchise's history or requirements. Falling in love with a franchise idea before you've done the due diligence outlined here is a recipe for disaster. "You're quitting your job, getting rid of your benefits, taking your entire life savings, and doing something you've never done before," he says. "Before you do that, you owe it to yourself to do a little research."
5 Key Ways to Flop
1. Relying too much on your gut. Yes, you should heed your instincts, but the failure to do a thorough and clear-eyed investigation is the single biggest error in judgment that prospective franchise owners can make, according to consultant Mark Siebert. Making an emotional decision means you don't fully understand what you're getting into. "You'd be amazed," he says, "at the number of people who don't even read the disclosure document."
2. Failing to make the necessary calls. Franchisors must provide you with a list of prospective franchisees. Siebert says it's critical to call at least two dozen of them, especially those in the area you intend to open the business. Franchisees are remarkably open, he says, and you will learn a great deal about the true experience of owning the franchise and its potential rewards and pitfalls.
3. Being unclear about the added responsibilities you will have. You won't just be running your own business. You also will be reporting to a corporate franchisor. And this may often involve filing reports, participating in conference calls, attending training sessions and engaging in a lot of other franchisor-required activities. So be aware of all corporate obligations.
4. Underestimating the amount of time and money required. Franchise consultant John Macaluso always cautions his clients that it can take at least six months to a year to get a franchise off the ground--sometimes longer. "Many franchisees," he says, "assume that the franchisor has done the work and all he or she has to do go in every morning, count the money and make the deposits -- and then blithely say to themselves, 'I'll go play golf now.' Wrong!"
5. Ignoring franchisor support. In many cases, franchisors have developed tools and support systems to make their franchisees' business lives easier and to better ensure the chances of success. Some may offer marketing and administrative assistance or access to a coordinated network of franchisees. Be sure to look carefully at the resources your franchisor provides and take advantage of those that can help your business. There's no sense in needlessly reinventing the wheel, says Macaluso.