Franchise Buying Guide

True Confessions

The Disenfranchised
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Bradley spoke to franchisees the franchisor suggested and found all were doing very well. However, when he randomly stopped by another of the sandwich franchise's locations, he heard two hours' worth of horror stories. Bradley figured this location was the exception to the rule but now realizes he should've investigated further. "Don't just talk to the people the franchisor [provides]," advises Bradley. "Stop in at other stores and talk to the owners."

Seid: There's an anonymity over the telephone. Call and be very respectful. Say, "Hi, I'm looking to buy a franchise. Is now a good time to talk?" Call those who have left the system in the past year. Most of them are unhappy--you'll find out why.

One major contention Bradley has with his franchise is unrestrained growth. With no protected area, he found three stores placed less than a mile away from his Worcester, Massachusetts, location.

Zarco: The franchisor reserves the right to place a competing unit in a location regardless of the impact that will have on existing franchisees' sales, profits and incomes. When you join a franchise, you should have an expectation of reasonable impact. Factor into your business plan how your business will be affected by a first and then a second location near you, typically taking 10 percent and 5 percent of your sales, respectively.

Leo thought the business-coaching franchise he purchased in Ohio would allow him to help others run successful businesses, but he quickly became unhappy with his own. Leo felt the education provided by the franchisor "became stagnant." "They weren't creating new tools, providing new information or research to help my business," says Leo.

Before sinking your money into a franchise, Leo suggests some questions to ask franchisors: "How have you changed in the last five years? What are you doing today that is different from last month, especially with technology? What's the copyright date and publication date of your procedural manuals? If it's more than a year old, it's old."

Seid: [Also ask], "When was the last time you did consumer research? Who did it? What were the results? What have you done to improve your product?"

While Leo was well-qualified to offer business coaching, he was dismayed to discover unqualified fellow franchisees. Make sure the franchisor isn't accepting sub-par franchisees just because they have the money, says Leo. "If you have to jump through a lot of hoops and go through multiple interviews, then that franchisor has ethics about who joins the team."

Seid: Check for psychological and personality testing, serious questions about background and qualifications. And talk to other franchisees--if they're not up to your standards, get into a system where they are.

Samuel purchased an area development agreement for a Mexican food franchise in Kansas City, Kansas, after the franchise's CEO enticed him with stellar average unit volume numbers, which he later found to be inflated. "We had significant [verbal] misrepresentations," says Samuel, who claims the numbers the CEO gave him differed from those in the UFOC. Samuel also alleges the franchisor used aggressive sales tactics, even ignoring the company's own financial requirements so Samuel could qualify. A red flag? You bet.

Seid: Franchise salespeople are gifted. They play into your ego, drive, future and beliefs. You need an advisor. I send people to lawyers [I trust], because they'll dispassionately look at a franchise and say, "This is crap."

Zarco: When a franchisor is looking to go public and increase the value of its company, it [sometimes] engages in aggressive sales tactics by mispresenting the average unit sales volumes in order to seduce new franchisees. . . . [Sometimes, a franchisor] will bend the rules when it finds someone ready to put money down to open new units, even though that person may not be financially qualified.

When Samuel asked about marketing strategy, he was told it consisted of giving away free food at events. The franchisor did not heavily advertise; instead, marketing funds were used for the CEO to attend awards shows and to provide free salsa bars for celebrities.

Seid: Ask the franchisor what results they're seeing in their advertising. If they're not measuring results, get up and run--they're amateurs. Ask them how much of the advertising dollars are spent on nonmarketing functions. Most franchise agreements allow the franchisor to spend [advertising] money on administrative costs, which can include the salary of the marketing person up to 18 percent. It can also pay for overhead.

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This article was originally published in the June 2005 print edition of Entrepreneur with the headline: True Confessions.

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