Ask the Insiders

Common Mistakes, Negotiations and More

Caffey: What are the most common mistakes made by franchisees and franchisors?

Selden: From a franchisee perspective, a common mistake is not getting a good understanding of the franchise system, its track record or the financial performance that you can reasonably expect to get out of the system.

Burzynski: I think a common mistake is that often, individuals buy franchises for the wrong reasons and with wrong assumptions about the business. They may have recently been downsized or disappointed, and they feel that by buying their own franchise, they are completely in control of their destiny and they'll never have to answer to anyone. I often see unrealistic expectations, no matter what we say in the application process. Some owners expect instant success as a result of the system, as if it will happen all by itself. Then, when they actually become accountable, they realize that it is all up to them, that there just isn't a magic bullet. They also realize they are account-able to their clients and their employees, as well as to fellow franchise partners. Too many investors underestimate what it takes to [build a] successful franchise.

Fertman: That's an important point. People can come in sometimes with expectations that are too high; they just don't understand how much work is involved or the commitment it takes. As Linda said, it's not going to happen by itself. The franchisor can be guilty of setting unrealistic expectations as well. Candidates have to talk to other franchisees and understand fully what they're getting into.

Selden: I think it's critical to ask existing franchisees, "If you had it to do over again from the start, would you invest in this franchise a second time?" If the answer is yes, they're sure going to tell you about it, because they're probably enthusiastic about the business, they like the brand, they like the system and they're OK with the hard work. If it hasn't worked out for them, for whatever reason, they'll tell you that, too.

Burzynski: Here's a great question to ask: As a franchisee, if you could do one thing over again to help make your business even more prosperous, what would it be? That's a won-derful question because it helps foster honesty about the lessons they have learned in the business.

Selden: You'd also want to ask existing franchisees if the support services from the franchisor contributed real value, and if the system's marketing support is effective.

Fertman: Another important question is, How much money can I make? Of course, you're going to get all kinds of answers to that, but the financial issue is always an interesting one.

Caffey: Don raises a good point. Andy, how does a franchisor legally answer the question, How much money can I make?

Selden: Well, the hurdles to franchisors making legal and proper financial disclosures today are so low that many companies with a favorable story to tell can-and I would argue should-tell that story in the UFOC. If they don't include financial performance information in their offering circulars, they are not able to legally provide performance information themselves. In that case, franchisors have to refer the candidate to other sources-existing operators, the library and business magazines, their bankers-to ask what similar businesses can do.

Fertman: If I were a new franchise investor looking for a franchise in a particular category, I'd investigate as many franchises within that category as I could find. I would want to get a sense of their average unit volumes and growth rates, and compare them.

Caffey: Should a franchisee expect to negotiate the terms of a franchise agreement? Is that common in franchising, or is it relatively rare? What's your experience in negotiating the terms of a franchise agreement, and what should a franchisee expect?

Burzynski: Franchisee candidates should anticipate that the franchise agreement is the franchise agreement, and it will not be fundamentally altered. I've got to assure every single franchise partner that they all have the same agreement. Now, we have taken steps to clarify some aspects of a franchise agreement by way of a letter of clarification, but material terms generally do not change. Every franchise partner of ours has the same agreement; no one has to guess whether someone negotiated a better deal.

Fertman: For us, the bottom line is: If it's outside the disclosure, we can't change it. Within the disclosure, we describe all the different scenarios that a franchisee will encounter. As we've grown, we've accommodated different situations where we're doing business with oil companies, for example, going into convenience stores and dealing with larger corporations. We changed our rules a bit and modified our franchise agreements somewhat to handle those types of situations.

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This article was originally published in the January 2006 print edition of Entrepreneur with the headline: Ask the Insiders.

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