Steve, my neighbor and casual client, was agitated. "I want
out of my contract," he said. But this time there was nothing
I could tell him.
Just a few years earlier, Steve had been laid off from his sales
job. At age 50, with a college degree and a proven track record, he
was ready to be self-employed.
Steve found a franchise that looked all right, and he came to
me. I told him to avoid the opportunity and explained that the
income generated would be a lot less than what he
anticipated-certainly less than what he was accustomed to. I told
him of the steep competition and suggested a number of other
opportunities. But his severance nest egg was being eaten away, and
the pressure became unbearable-so Steve made a snap decision in
order to gain a sense of direction in his life.
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All I can tell Steve now is, it's a lot easier to buy a
franchise than it is to be released from one. Because his
franchise's contractual post-termination covenants prevent him
from operating a similar business, he now toils at what is, in
essence, a low-paying job.
If only he'd listened . . . will you?
Find the Right Fit
What's in a day's work?
What do you want to be when you grow up? That sounds pretty
elementary until you realize most franchise agreements have an
initial term of 10 years, and that means performing your basic
duties as a franchisee for an entire decade. Consequently, when you
buy a franchise, you must envision the day-to-day routine.
For example, are you afraid to pick up the phone and make cold
calls? Then you're probably better off with a storefront where
the customers find you. If you were to run a homebased franchise,
would you be prepared to take calls on Sunday morning?
Many times I've seen avid enthusiasts pick a franchise
merely because it involves their current passion, let's say
golf. Unfortunately, when starting golf equipment franchises, they
find they have little or no time to play the game that drew them to
the business and become frustrated by the experience.
Know Thy Banker
Personalizing the purse strings
While dining recently with eight other attorneys who represent
some of the largest franchise concerns in the country, I asked,
"What's the one thing every prospective franchisee should
know?" The consensus: When shopping for a franchise, go to
your bank first.
Banks familiar with franchise loans have strong opinions about
the viability of different concepts. Some even have a list of
concepts they make loans on, and if yours isn't on the list,
you have little chance of getting funded.
Lenders will also scrutinize franchisors for systemic issues you
may not think about. Banks see profit and loss statements sometimes
unavailable to you, and they know which franchises are in
trouble.
Building this relationship will also give you an idea of how
much financial leverage you can command. This is important, as
I've seen many people open retail stores without adequate
inventory. You can't make money if you don't have anything
to sell.
Become a Retail Baron
Power comes to those who ask.
Take the time to get ahead of the curve as it relates to the
retail development of a given area. When you see "For
Lease" signs going up on the windows of a good strip center,
chances are, you're too late to become a tenant. National
chains, brokers and real estate developers offer opportunities only
to those in their loop. In particularly hot areas, developers often
try to secure leases before ground is broken.
In order to become an insider, discover what's coming to
your area by simply calling the numbers on signs posted in bare
commercial areas. To get on the inside track, you probably need to
have a net worth of at least $200,000 so the landlords have
something of yours to levy if you default on the lease. Your
chances are also better if you align with a generally recognizable
franchise concept.
In the meantime, take a look at the tenant mix in a particularly
strong retail center, and make it a game to predict what stores
will be opening there. A deal is probably being done somewhere else
in your city that incorporates the same tenants, and you may be
able to insert yourself with a complementary use. Landlords love to
do package deals, so start early to make sure you're part of
the package. You need to understand your local market so you can be
at least one year ahead of your planned opening date.
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