The Insider

Ever think there must be some secret trick to buying a franchise that you're not privy to? Luckily, our franchise expert is in the know . . . and he's ready to talk.
Magazine Contributor
7 min read

This story appears in the June 2001 issue of Entrepreneur. Subscribe »

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 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.

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 , 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 . 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 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.

Expertise Counts - Pros can magnify your success.

A small cadre of professionals has worked in this industry for decades. These executives move freely from concept to concept and know the gossip, the players and the small dramas that take place in franchise systems nationwide. The insight you can garner from this group will help you to scrutinize the content of the splashy ads you find in the trade journals.

If you've already contacted a banker, it's also a good idea to find a commercial real estate broker, a franchise attorney and an accountant. The broker won't cost you a thing, and the other pros will probably grant you free initial consultations. One way to find these experts is to attend the quarterly meetings sponsored by the International Franchise Association in major cities across the country. You can circulate and meet these people during the networking portion of the meetings. I assure you those contacts you make there will be invaluable.

Don't Fight the Odds
The UFOC doesn't lie.

Entrepreneurs are generally an optimistic bunch, and one of the easiest mistakes to make as a prospective franchisee is believing your hard work, sales ability and cost-cutting ways will propel you to greatness, notwithstanding the known averages of a concept. It can all start when you review Item 7 of the Uniform Franchise Offering Circular, which deals with the franchise's estimated initial costs. After looking at those costs, it's human nature to assume you'll spend less and perform better than the averages. This assumption, of course, is based on ignorance and enthusiasm, which are potent indeed.

Such fallacious assumptions also propel eager franchise shoppers to assume they can exceed the average gross revenue experience of the chain. Remember, those averages are accomplished by people who are just as motivated and talented as you.

Another mistake: projecting too far into the future. I've seen people purchase huge protected territories and get stuck with multiunit development schedules, only to decide later the businesses aren't to their liking. Because prepaid territorial fees are often not refundable, these folks eat the costs.

Inquire Within
Ask your peers.

Although the UFOC offers a range of information, you should consider it only a starting point. The best analysis is to determine which existing franchisees are involved in situations that most closely resemble your market.

For example, even if the chain's sales averages are high, you may learn that stores in the Midwest are underperforming or maybe that stores with drive-thru windows are pulling the averages up. Put a coffee shop on the wrong side of the road, and you'll suffer the consequences.

Your team of experts can help. Also, take time to speak with existing franchisees to learn the story that the slick franchisor brochure doesn't reveal. While you're doing your investigation, you should also search for existing franchise stores for sale. As with any other property, you can find great deals from people who want to move on.

The right opportunities are out there. Follow my advice; benefit from your own foresight. If one deal isn't perfect, look for another. With more than 2,000 franchises to choose from, you won't regret being diligent.

Todd D. Maddocks is Entrepreneur's "Franchise Focus" columnist.


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