Q: There are some areas of
franchising I just don't understand. How can I determine which
professional advisors I need to make sure I check everything out
completely?
A: The most common type of advisor
used by prospective franchisees is an attorney. If you decide you
want to have an attorney review a franchise agreement for you, it
is essential that you:
- Make sure you're using an attorney who is familiar with
franchise agreements. You wouldn't use a foot doctor for brain
surgery—so keep in mind that lawyers specialize as well.
- Find out whether the franchisor is willing to make changes to
the franchise agreement before going to the lawyer. If not,
don't pay to have your attorney rewrite the franchise
agreement. It will just waste the attorney's time and your
money.
- Ask for a fixed rate or an estimate to review the document.
With many attorneys charging hundreds of dollars per hour, this is
not a good relationship to enter into without some understanding of
what the costs may be.
Some prospective franchisees also get their accountant involved.
There are two areas where this may be helpful:
- Your accountant can review the pro forma profit-and-loss
projections you've prepared. Keep in mind, the validity of any
analysis the accountant performs will be limited by the quality of
the information you've researched. If your assumptions
aren't valid, the P&L projections won't be,
either.
- He or she can also review the franchisor's audited
financial statements. The important factor to note here is that
many franchisors reinvest most of their profit back into growing
their system. It's typical to find that rapid-growth
franchisors have very little reported earnings. If you find a
slow-growth franchisor with low earnings, beware.
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There are also some common types of advisors who may not be
professional or may be biased in their advice. Beware of input
from:
- Investment advisors. These are the folks currently
advising you about the assets you may want to use to fund your new
business. Common sense says that their income will decrease if you
take funds away from their management to use for opening your own
business.
- Friends, relatives and acquaintances. Be especially
careful about evaluating advice from people who have no firsthand
knowledge of the franchise business you're investigating. They
might be able to advise you about your personal strengths and
weaknesses, but not about a business they have no direct experience
in.
Use your common sense, and stick with advisors who are true
professionals. When all is said and done, you'll either feel
right about proceeding with a franchise, or you won't.
Regardless of what others advise you to do, don't ever proceed
with a franchise if you're not personally confident you'll
succeed.
has almost 20 years of experience in franchising, both as
a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best matches
their needs.
The opinions expressed in this column are
those of the author, not of Entrepreneur.com. All answers are
intended to be general in nature, without regard to specific
geographical areas or circumstances, and should only be relied upon
after consulting an appropriate expert, such as an attorney or
accountant.