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Sizing Up a Franchise in Six Steps

July 28, 2011
URL: http://www.entrepreneur.com/article/220082

The first step in finding the right franchise system is to look inward--to determine what you really want from this investment and the qualities you seek in a franchisor that will help you attain the lifestyle you desire. This includes making a list of your goals and categorizing them into "wish to have" and "must have" lists.

The business may seem sexy, the products or services cool, the customers enjoyable, the business model resilient, and you fit in well. But if the franchise opportunity won't deliver your desired results with a high degree of probability, it is the wrong franchise for you.

Below are six steps for researching and comparing franchise opportunities against their ability to deliver your "must have" and "wish to have" goals. The criteria you will use to compare and contrast businesses, regardless of whether they are in the same industry, are their ability to deliver your desired lifestyle.

Related: The Franchise 500

Step 1: The Initial Interview
The first interview and presentation of the franchise concept is most likely conducted by telephone and sometimes in person with a franchise sales representative. This is a "getting to know each other" step, where you help the franchise sales representative understand who you are, what makes you successful, and what you are looking to accomplish. The franchise sales representative in turn helps you understand who the franchisor is, what makes the franchise opportunity unique and who makes a successful franchisee. You both begin the process of determining whether your skills and aptitudes match the skills and aptitudes required to succeed within the franchise.

Step 2: Qualification
At this stage, the franchisor will seek to gather and offer more specific details, including whether you have the financial capital to undertake this business opportunity. The purpose is to determine if there is a fit from the franchisor's perspective. This interview may be conducted by telephone or in person, if the franchisor has a sales representative local to you. If you create an open and honest dialogue with the franchise rep, he or she will probably see the potential fit before you do because an insider's perspective on what it takes to win in the system.

Step 3: FDD and Franchise Agreements Review
Most buyers at this phase conduct a business review of the terms and conditions of the FDD (Franchise Disclosure Document) and make sure you and the franchisor are in agreement on all major points. The FDD is a document the FTC mandates each franchisor to offer franchise candidates. Some states may require additional disclosure information in the FDD.

There are two ways to look at a FDD. The first is from a business perspective. Does the disclosure make sense? Can you live with the terms and commitments of the agreement? The second perspective is legal. You can bring the FDD to an attorney, though at this data-gathering stage, that might be premature and an unnecessary expensive. Once you have established the fit, then it will be time to conduct a legal review.

Related: Buyer Beware: Franchise Warning Signs

However, now is the time to become aware of what the business commitments look like and whether you are willing to honor those commitments. If for whatever reason there are commitments or obligations in the franchise agreement you can't live with, end the process here. If you can honor these commitments with integrity, proceed to the next step.

Step 4: Franchisee Research
Once you've made it this far, now is time to interview franchisees, gather data, compare the information you receive from franchisees with what you received from the franchisor, and determine whether you will produce your desired results with a high degree of probability.

Ideally, this is a period of intense data gathering and heavy analysis. Here is where you test the veracity of the franchisor's systems and determine whether the franchisor is skilled and has a profitable business model positioned for the long haul. If the franchise appears to produce your desired lifestyle with a high degree of probability, it's time to invest in professional advice. You need to have a franchise attorney review your FDD and an accountant review your business plan.

Step 5: Visiting the Franchisor's Home Office
Never do business with people you have not met. Franchising at its best is a highly personal relationship. You are entrusting your dreams and capital to the care of the franchisor leadership. Decisions made on the executive level have an impact on whether you'll be able to meet your personal objectives. Go to the corporate offices, meet the decision makers, shake their hands, look them in the eye, and ask tough questions. You have already evaluated the business model against its ability to produce your desired results. Now it's time to evaluate your trust level of the franchisor's leadership and key management.

Step 6: The Yes/No Decision
It's time to make up your mind about whether you design a new life and career of your choosing or to go back to the way it was.

Related : Five Questions to Ask Franchisees Before You Become One