Would You Like a Franchise With That?

What to Look For

Analyzing unit economics is key to understanding what kind of business you'll be investing in and what to expect. "The numbers don't lie," says Rowe. He suggests that rather than getting swept up in your emotions, you should objectively determine whether a specific franchise is a good bet for you. "Get out the ruler, and make a chart. [See] what the per-unit sales volume has been for the last five years. Then extend that line out a couple more inches, and get a sense of where it's going. Is the food cost going up or going down? Is the check average going up or going down?"

Also, take a look at how many stores have opened and closed in the past several years to get an idea of the franchisor's expansion efforts and how other franchisees have fared. "A really good indication that a brand works is [that] there are multiunit franchisees," Rowe points out. "To get rich in the franchise business, you never do it on one store; you always do it on multiples. You're building a franchise company." Even if you're not ready to begin thinking about constructing your own burger empire, it's still helpful to see that existing franchisees in a particular system are able to achieve those heights of success.

You would be remiss to decide on a franchise without speaking to existing franchisees. "I love picking up the phone and calling franchisees, and just asking, 'Hey, if you had to do this all over again, would you?'" says Rowe.

Most people looking to invest in a franchise know it's critical to pick the brains of existing operators to get an insider's view, but make sure you hear both the positive and negative. Fangary did so with all seven of the Farmer Boys' franchisees. Davia and Eric Stevenson, 42 and 41, respectively, did the same with current Wendy's franchisees before purchasing their Wendy's franchise in 2002. "I encourage people to hear even the things they don't want to hear," says Eric. "If a franchisee is disgruntled, or you don't like their style and think you can do better, make sure you really understand what their issues were because they didn't get to their position overnight. They all started out as optimistic as any new franchisee would."

Hogan finds that most candidates do speak to other franchisees and typically ask questions like, "How much money can you make? How long did it take you to break even? What are my risks? What are my downsides? What could happen to me negatively?" But be sure to also ask, "How good is the company from a support standpoint? Do they provide good training, support and all the technical aspects?"

Training was what led the Stevensons to Wendy's, since they had no prior experience in retail or fast food. "[Wendy's] had, by far, the most extensive training program-mine was over seven months," says Eric. "For the amount of money you spend [to become] an owner, you want to make sure you know what you're doing."

However, Hogan maintains there are still other core points that many prospective franchisees never touch on, like the company culture. While the financial aspect of the business is very important in evaluating a franchise, Hogan believes one of the most overlooked factors is the long-term relationship you have with the franchisor-undoubtedly influenced by sharing common goals, values, beliefs and objectives. "Many people don't do enough research digging into what the company is about, what they believe in, what they're trying to accomplish, and whether they will fit into the culture," he says. With franchise agreements spanning anywhere from 10 to 30 years, an ill fit from the outset will be that much more painful to endure. In dealing with hundreds of franchise companies, Hogan has found that turnover isn't always based on financial matters; it's often due to dissatisfaction with the relationship.

Consequently, getting to know the franchisor and what it stands for is a must. While you can ask many of the same questions of relatively young franchisors, you'll uncover a more detailed history from established companies-which may give you greater assurance that the franchise you're investing in is stable and secure.

As the CEO of Dunkin' Brands Inc. in Canton, Massachusetts, Jon Luther knows the ins and outs of franchisee-franchisor relationships, handling the parent operations for such brands as Baskin-Robbins, Dunkin' Donuts and Togo's. As Luther sees it, "You want to be with firms that have won the marathon, as opposed to the 10-yard dash-those that have been around and been tested through the economic times, through the competitive set, to make sure they can stand and grow."

Whether you're leaning toward a large or small system, Luther offers the following advice to franchisees looking for the right franchisor:

  • Find a franchisor that's committed, dedicated and proven to build the brand-and that accomplishes that through awareness, store volume, customer love and loyalty. Luther warns, "If you don't have a brand that's going to do that, they just want your royalty payment, and that's it."
  • Find a franchisor dedicated to your growth, beyond just same-store sales. Luther recommends looking into whether they provide infrastructure services, supervisory training and help growing the business. Find out what their marketing department and development teams look like. "What have they done lately that has really won the day?" asks Luther. See whether the franchisor helps single-unit operators become multiunit operators.
  • Find a franchisor committed to the concept's integrity. "Are you going to find when you join that [the concept is] in supermarkets, on the shelves, on candy bars, in gas stations, and the franchise has no discipline over how it grows?" says Luther. He adds that "dropping your brand everywhere-diluting it-makes it lose its value." Luther stresses that critical components of concept integrity and execution lie within the franchisor's commitment to ensuring standards, emphasizing great customer service, and offering a polished concept.
  • Find a franchisor that innovates. Luther believes an ideal franchisor should be doing all of the above and incorporating innovation into each aspect: "The best mystery shopping program, IT polling systems, product development and real estate ideas; and new store concept ideas that keep the concept and brand alive and vibrant-if you're my franchisee, I want to make sure you understand we have your interests at heart by providing these [components]."

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This article was originally published in the January 2005 print edition of Entrepreneur with the headline: Would You Like a Franchise With That?.

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