Our tips for dealing with the real-life scenarios you'll face when investigating and investing in a franchise
I often get e-mails or phone calls from prospective franchisees, thanking me for the information Dave Thomas and I included in the book Franchising for Dummies. Sometimes they'll recommend topics to include in a future edition, and I frequently respond pro bono to e-mail questions regarding real-life scenarios we couldn't fit into the book.
For most prospective franchisees, the franchise researching and investing process is successful. However, "successful" doesn't always mean without any hitches, as you'll see in a few of these situations.
The Deal Is Different
A couple had been looking at buying a franchise for over a year. During that time, they investigated a number of industries and met with several franchisors. They established the benchmark criteria they felt were important in a franchise, including certain levels of fees, types of services and experienced management. Finally, they made their choice and, full of excitement, went back to the franchisor they had met the prior year to tell them they were ready to invest. Everything was great...until the franchisor sent them a copy of the latest Uniform Franchise Offering Circular, and the couple realized the franchise opportunity had changed. They felt the franchisor was trying to pull a fast one and asked me what to do.
Franchisors routinely and frequently reevaluate their franchise system for ways to improve its performance. Often, a prospective franchisee won't see the changes, since they might impact operating procedures, field services, training or hundreds of the other details related to the franchisor's operation of the business.
Franchisors also modify their franchise offering to reflect changes to the business or competitive changes as they relate to franchise sales. Anytime a franchisor makes those types of changes, they're included in the new UFOC, which is typically published annually. Changes to franchise offerings are routine, and, unfortunately for this couple, the royalty rate and the overall investment requirements had increased since the prior year.
Once we were able to explain what had occurred, we recommended that they reevaluate the franchisor based upon the criteria they had originally established. In addition, we suggested they speak again with some of the existing franchisees to determine what they thought of the changes and whether those franchisees planned to invest in additional franchise units in the future. We also advised them to talk to the franchisor about buying an existing franchise, to see whether the franchisor would allow them to simply transfer the agreement, leaving in place the terms of the original agreement.
Situation No. 2
Improper Earnings Claims
In franchising, with limited exceptions, the only way a franchisor can legally provide you with information about what you can expect to make as a franchisee is to provide that information in writing and include it in the UFOC in Item 19. In this particular franchise, the franchisor had not included earnings claims. During the sales process, the prospective franchisees were informed inadvertently by the franchise salesperson that the average location has a certain level of sales once it reached maturity. The salesman immediately realized his error and told the franchisees he should not have given out that information and asked them not to let anyone know, because that type of slip would cost him his job.
At the closing, the franchise salesperson gave them a lengthy document to sign. The pages were in the form of a questionnaire and dealt with the franchise sales process. Asking a franchisee to sign such a document at the closing is routine, ensuring the franchisor didn't break the rules as they recruited the prospect and also that the franchisee provided honest answers during the selling process. This questionnaire asked the franchisees to state they had not received any information on unit performance, and, if they did, that they would not rely upon the information. While they wanted the franchise, they actually had relied upon the information in making their decision. They didn't want to sign anything that was untrue and refused to sign, then called us and asked us what to do.
Had they followed the advice in the book, they would be working with a qualified franchise lawyer and would have dealt with the matter long before they got to the point of signing the franchise agreement. Since I knew the franchisor personally, I felt fairly comfortable that the slipup was an accident--but that might not be the case all the time, especially if there is no Item 19 disclosure. Since they still wanted to move forward, we put them in touch with a local franchise lawyer who met with the franchisor to seek a solution to the problem.
Prior to closing on the franchise, the prospective franchisees did a very thorough and independent reevaluation of the franchise and created a business plan for the business. They called several franchisees in the system and determined for themselves the range of sales they could likely expect. At that point, while the franchise salesman had made a mistake, the prospective franchisees could honestly say they were no longer relying on that information, because indeed they had gotten the information they relied on from independent sources. They were then able to sign off on the questionnaire honestly and close the sale.
Situation No. 3
The Salesman Is a Broker
A couple looking for a franchise surfed the Net for information on what was available. They were both schoolteachers who had never bought a business and were intimidated by the pressure they felt in just researching franchise opportunities. Late one night, they discovered the Web sites of a few professional service firms offering to coach them toward the perfect franchise. Even better, they thought, these firms weren't even charging a fee--they were paid by the franchisor only when people actually bought a franchise.
The coaching firms all claimed they had researched thousands of franchise opportunities and selected several that met their criteria for return on investment, failure rate and other important attributes. The couple was sold. Through a lengthy interview, the advisory firm they selected was able to narrow the list of franchises that seemed right for the couple down to a few. The consultant then introduced the couple to the franchisors. During the coaching session, the couple was provided with information on what they should be looking for in a franchise opportunity, so they felt prepared to ask the right questions when they met the franchisor.
Somewhere during the process, they picked up a copy of Franchising for Dummies and saw that Dave Thomas and I had recommended not working with franchise brokers. It was then that they understood that their "coach" was really a "broker," and, while he was advising them, in reality he had been hired by franchisors for the sole purpose of convincing franchise shoppers to buy from his clients.
They truly thought that the broker had helped them and prepared them for the task of buying a franchise, but they were concerned, since they were about to invest their life's saving based upon this broker's advice.
Dave and I had a lot of reasons for making our recommendation about brokers. The most important: Brokers try to appear independent to the prospective franchisees, claiming to be franchise counselors and coaches and even calling the prospective franchisees their clients. They emphasize that they're helping the franchisee make a selection that's right for them, when they work for and are the agents of the franchisor. They typically steer the prospect only to their clients so they can earn a commission on the sale. In the age of Enron, it's obviously dangerous to take advice someone who has a clear conflict of interest.
I looked at the list of franchisors the broker "picked" for the couple. Then I had the couple research all the other franchise offerings in those industries--they were able to do so quickly and cheaply by going to Web sites like this one. I asked them to make their franchise decision based upon complete facts and not only limit themselves to the few companies the broker had recommended.
The broker told them that if they were serious about buying a franchise, they should be prepared to make a decision in two to four weeks. I said they should take their time, and the process, done right, would likely take four to six months from beginning to end. What they found by doing the research themselves was a much broader franchise offering than the broker had led them to. Through their research, they discovered several alternatives that offered different fees, services and brand personalities and, in some cases, a better return-on-investment potential. Some of the franchisors were more established, and some had new and exciting possibilities that the brokers clients didn't. I strongly recommended, however, that they not discount the broker's recommendations entirely, since some of those franchisors were also good candidates for them. Ultimately, the couple made their franchise selection based upon their research.
The moral: You should use an advisor who works for you, not the franchisor. Call local franchise lawyers. And remember, franchise brokerages are fairly unique in the business world in that they try to convince a buyer they work for them, while they're really a commissioned agent of the seller.
If you've had problems during your franchise search, and would like your real-life situation answered or possibly discussed in a future column, e-mail your story to me at firstname.lastname@example.org.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid co-wrote Franchising for Dummies (IDG Books) with Dave Thomas, the late founder of Wendy's, and serves on the International Franchise Association's Board of Directors.