A Tale of Two Opportunities

Evaluating a Franchise

Finding a comfortable fit is also important in making a franchise investment. There's a wide variety of businesses available; your job is to find one you'll enjoy building and operating. Yes, it should be a fresh, vital business concept that's going to be around for a while, and it should have the promise of profitability, but make sure you enjoy the operations. My wise youngest brother once told me that a prospective franchisee should not only understand the business, but also ask about the job; that is, find out what you will actually do every day to make the business a success. For example, a training business may appeal to your inner professor but may require you to make three hours of cold calls every day to generate clients. When evaluating a franchise investment, don't let the glamour of the business blind you to the hard, everyday work at hand.

Franchise purchasers have a significant advantage over business opportunity purchasers: A bodacious slab of information about the investment is handed to you on a silver platter in the form of an offering prospectus, or Uniform Franchise Offering Circular. Federal law and many state laws require that all franchisors deliver a UFOC at least a couple of weeks before the buyer pays any money or signs a binding legal contract. If you are at all serious about a particular franchise, by all means, ask for a UFOC early in the process.

A UFOC is designed to deliver a wide range of information about the franchisor and its franchise offering. You'll learn about the franchisor's business experience, its litigation background, financial dimensions of the franchise investment, detailed contact information about existing franchisees in the system, and background information on numerous other topics. In an exhibit to the UFOC, you'll find a copy of the form of franchise contract and a set of the franchisor's audited financial statements. Given the investment's advantage of ready information, it's surprising how many people don't actually read the UFOC before jumping into the franchise. It's well-organized and written in plain English, so it's not that tough to crack. Take the time to read it-it'll put you well ahead of the game.

The UFOC answers most of your basic questions and gives you information to drill down for a more detailed understanding of the franchise. The UFOC won't tell you everything you need to know, but it does provide the basics. You take it to the next level by preparing an accounting projection and a break-even analysis with a good accountant, considering locations and visiting with current franchisees. You can also work with an attorney to review the form of franchise agreement. You want to know from your legal counsel what rights are granted and what obligations are imposed on the franchisee, and whether any parts of the contract are unacceptable or injurious to your interests.

With a full list of franchisee contact information, your job of contacting franchisees is simplified. Get on the phone, make appointments, then visit as many as you think are necessary to get a good cross section of views and experiences with the franchise program. Ask the franchisees for their views on the franchise program, the value of the training and support they have received from the franchisor, the everyday work involved in the business, and the profitability of their operations. Sure, you can ask them what their gross sales were last year and what kind of performance they expect this year. Most franchisees will be candid and open with you, and freely discuss their experience. Their views are immensely valuable; they're not trying to sell you on the program, and they have firsthand experience. Don't expect 100 percent smiles and sunshine about the franchise investment, but if a majority of franchisees endorse the program and tell you they're making a profit, that tells you a lot about the value of the investment.

State authorities in franchise registration states can confirm over the phone whether a particular franchisor is registered to offer and sell franchises in that state. They can also tell you if initial franchise fees must be deferred until you open for business or if other financial protection is in place for investors in the state. Any protective arrangement will be noted in Item 5 of the UFOC and in the state appendix.

Franchises and business opportunities: The DNA may be the same, but their differences run deep. Put in the time and effort to research the offerings, and you'll find a program that offers an exact fit for your needs.

For more information on buying a franchise or business opportunity, visit Entrepreneur's FranchiseZone.

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This article was originally published in the May 2005 print edition of Entrepreneur's StartUps with the headline: A Tale of Two Opportunities.

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