Never Buy a Franchise Without Researching These 5 Sources
Free Book Preview: The Wealthy Franchisee
While the internet is an extremely valuable resource in your hunt for potential franchises, let’s discuss some of your other options for information gathering.
Your first source of information on a franchise company will be the franchise company itself. It will typically be able to provide you with a wealth of information, including the franchise disclosure document (FDD), franchise brochures or other promotional materials, links to franchisee testimonials, and perhaps information on the industry in general.
You can expect the franchise salespeople will attempt to qualify you on the first call. Most will ask you to fill out a confidential information request form (CIRF) and discuss their process for mutual evaluation. Typical qualifying questions will involve your capitalization, desired geographical region, and timetable for deciding. Assuming you’re serious about investing in a franchise, you should be frank with your answers.
The salesperson will then often propose a series of steps you’ll both go through to learn more about each other. Some of the steps may include a review call to go over the FDD, market visits, calls to franchisees, and investigating the market for your services. Take advantage of this resource as soon as you’re down to your short list.
Another resource that can help guide you through the process of buying a franchise is a franchise broker. Brokers, who often call themselves “franchise consultants,” can be a valuable tool in helping you assess your options.
Unlike a franchise salesperson, a broker isn’t limited to a single franchise concept and may represent a hundred or more franchisors. In the best networks, the broker is trained to help a prospective franchisee narrow their choices to a handful of opportunities for which they are well-suited.
Typically, you won’t pay a fee to the franchise broker. They provide this service in exchange for a success fee (essentially a commission) paid by the franchisor—typically in the range of $20,000 or more—if an introduction they make results in a sale.
Ultimately, brokers are a great resource that can provide genuine value, but they aren’t the completely unbiased buyer’s advocates some would have you believe. So while brokers are a resource you should certainly consider, ultimately you should make certain they’ve steered you in the right direction.
Trade and Industry Shows
Another great place to get information on franchises you might want to consider is at franchise trade shows and, if you’re looking in a specific field, industry shows. Franchise shows in particular will give you an opportunity to speak with several hundred franchisors from a variety of industries in just a couple of days.
These shows have other advantages as well. Generally speaking, they offer seminars on all aspects of franchising—giving you a chance to learn before you buy. These seminars feature topics like industry trends, understanding contract provisions, veterans’ franchise programs, financing, and overall success as a franchisee and are often worth attending.
Keep in mind that these shows may not provide a representative sample of the franchise marketplace. The exhibitors tend to skew slightly toward younger franchises and ones with lower investment levels.
The website of the International Franchise Association contains a wealth of information on franchising. In addition to allowing you to search select franchisors, it provides information on industry suppliers in areas such as finance, insurance, veterans’ programs, minority programs, and the franchise buying process.
Another thing you should be doing is visiting competing businesses—both franchises and independents—in your community. Drive around for a day or two, tool around on the internet, and start taking notes. Who are the competitors in the businesses you are considering? How long have they been around? What are their competitive strengths and weaknesses? What is their pricing structure? What kind of locations do they have? Write it all down—it will provide the grist for some good questions for prospective franchisors later on.
Also visit any local establishments that are in the same general segment you’re considering during off-peak hours. Talk to the staff, who are often surprisingly willing to share information about how the business is doing if approached correctly. Get a feel for how these businesses compete in the marketplace.
If you’re interested in a business that doesn’t have a physical presence, spend your “drive time” on the internet looking at their website. Note their prices and how they position the offer. Try to get a feel for how big their market is. If it’s a service-based business, call them up and ask for a quote.
Find out what advantages they have and how they’ll compete with you. Ask them the same questions you asked your targeted franchisor. What support services can they count on? What does their fee structure look like? What do they think of the market and the franchisor? Perhaps they can tell you something about the company you didn’t already know.
While you are at it, you may also want to visit locations for your target franchisor in some distant markets. See whether they’re all run in the same manner. Do they offer the same products and services, and at similar prices? Are their locations laid out the same? Are they all clean and well-run? If your first reaction is, “I can do a better job than they do,” that means the franchisor may not be doing a good job of quality control—and those substandard franchisees will ultimately be representing you, as they’ll be flying the same flag and telling their customers what they can expect when they visit your location. Also try to get a feel for what the owner or manager of the business does on a day-to-day basis. What may appear glamorous when reading about it on the internet may turn out to be more mundane when you are doing the job day in and day out.