Evaluating a Franchise Opportunity
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.
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.