From Business Owner to Franchisee
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
Q: My wife and I have been running our own retail business for 12 years. Our business is good and we've been fairly successful financially. Recently we received an offer to become a franchisee of a large, competitive chain. We've done some calculations, and if what they're telling us is correct, the deal makes sense from a financial point of view. We're wondering if there are other things we should consider in making our final decision.
A: While no one can dispute the importance of ensuring that the deal makes good financial sense, you're wise to look a little closer at what it means to become a franchisee, especially since you've been "doing your own thing" for a long time. Below are some issues to consider:
After 12 years, we suspect you've established your own customer base. Will your present customers become customers of the new brand? Will the product line stay relatively the same or at least have the same appeal in terms of quality and price as your current product line? Will you have access to products through the franchisor that you don't have access to as an independent retailer? Keep in mind that if the franchisor's product line is substantially different than your current line and won't appeal to your current customers, you'll have to start over in building your customer base.
If you become a franchisee, you must follow the franchisor's operating system-even when you believe your methods are better. One key to franchising is the ability to offer a consistent product and experience to the public. In order to accomplish this, every franchisee must operate in the same manner. Don't make the mistake of thinking that it won't really matter if you do some things differently. A good franchisor will enforce its operating standards to protect its brand name and its other franchisees. If you're not willing to conform, franchising is not for you.
Consider your exit strategy. Having a well-known brand name can increase the value of your business when you retire. Are there unreasonable restrictions on transferring your business? Does the franchisor's agreement allow you to pass your business on to your heirs? Does the term of the agreement and possible renewals coincide with your retirement plans? What are the post-termination requirements? If it doesn't work out, can you go back to operating an independent business or is there a noncompete clause?
If you choose not to become a franchisee, can you compete with the franchisor if it establishs a location near you? How many locations is the franchisor planning to open in your area? Can it offer better pricing to consumers or afford more advertising and promotional programs? Does your store look old and tired when compared to their standard décor?
Joining a franchise offers many advantages but it isn't the best choice for everyone. You're smart to look beyond the numbers.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the bookFranchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
For reprints and licensing questions, click here.