10 Things Every Franchise Owner Should Know
If you're thinking of buying a franchise, you need to ask yourself these questions before jumping in.
As more and more large companies downsize, replacing their midlevel employees with computers and outsourcing critical jobs to boiler rooms in Asia and Eastern Europe, literally millions of Americans, many in their 40s and 50s, are on the streets looking for a "second act" in their careers. Many of those folks are thinking seriously about buying a franchise.
Why? Because unlike standalone small businesses, franchises offer an increased degree of security. "People believe the rhetoric," says Peter Birkeland, author of Franchising Dreams: The Lure of Entrepreneurship in America. "You can be your own boss, you're operating under a trademark that has instant brand recognition, and the failure rate for franchises is lower than it is for mom and pop businesses."
To satisfy this sudden and growing demand, a host of new franchises are being formed, many with only a few scattered locations and unseasoned management. As with any other investment, the burden is on you to research a franchise carefully. Here are 10 questions you should ask before buying a franchise, even an established one. The first five questions you should ask yourself (be sure to involve your immediate family, as their happiness as well as yours will depend on the outcome). The last five questions, are for the franchise's corporate management.
1. How much intellectual stimulation do I need in my work? Although there are a growing number of professional franchises (such as executive coaches and corporate trainers), the vast majority of franchises involve basic retail and service businesses that require little education or sophistication. After all, if a business is complex and cannot be replicated easily, it probably cannot be franchised.
Most franchises want "hands on" owners-people who not only keep the books and handle the finances, but also provide customer service and clean the toilets as well. Depending on the labor market in your area, you may or may not be able to hire employees to do the grunt work.
If you have an undergraduate degree from a top university or an MBA or a law degree under your belt, you may well be bored out of your skull after a year or two running a franchised business. How will you handle that?
2. Do I have other priorities in my life? In just about every franchise agreement I've seen, there is a clause requiring you to devote substantially all of your working time to the operation of your franchise. Retailing and restaurant franchises, especially, involve grueling hours on evenings, weekends and holidays. If you are thinking about doing a little bit of consulting on the side, pursuing a cherished hobby or spending more time with your family, your hopes may be frustrated.
3. How do I feel about dealing with the public? Most franchises involve dealing with the public, and, truth be told, the public can be rude, crude, spoiled rotten, neurotic, shrieking and just downright vicious at times. Will you be able to deal with that without letting it get to you personally?
4. What is the likelihood of my getting a corporate job again? If you are relatively young and have marketable skills in your field, there is a decent chance you will be able to land another corporate job when the economy improves, probably in another year or two.or three. When that happens (and it will, eventually), do you really want to be tied down to an office-cleaning franchise with eight years left to run on a 10-year term? Once you sign a franchise agreement, there usually is only one way out-you have to find someone else to buy your franchise unit. Sometimes the franchise's corporate management helps you find a successor. Sometimes they don't.
5. How do I feel about being stuck in one place? When you buy a franchise, you are limited to a territory and are forbidden from opening units or even advertising outside that territory. In short, you are stuck in one place. You better make sure it's a place you know well.
If, like most Americans, you have moved around a bit in your life and career, you should ask yourself "If I had to be stuck in one place for the next 20 years, where would that be?" You may want to consider moving back to the community where you grew up and where your family is located, or perhaps to your future retirement community, and opening your franchise there.
6. What are the total costs of this franchise? A good franchise will give you a chart or table showing exactly what costs you should incur to start and run your franchise during the first year or two. If the franchise's UFOC does not clearly spell this out, ask them to do so.
Watch out for "hidden" costs that won't be spelled out even in the best-prepared UFOC, such as:
- Rent, security and utility deposits to your landlord.
- Legal and accounting fees (between $1,000 and $2,000 for an attorney to review your franchise agreements, plus an additional $500 to $1,000 to set up a corporation, LLC or other legal entity for your franchise business).
- The cost of debt service, if you have to borrow money to buy into the franchise.
- Travel, lodging and meal expenses when attending the franchise's required training programs.
- Property/casualty, liability and other insurance-you should make a copy of the franchise's insurance requirements from the UFOC, fax them to your insurance brokers, and ask for premium quotes before you sign the franchise agreement.
- Life and disability insurance, employee benefits and payments you will make to retirement plans such as an individual 401(k) or SEP-IRA.
7. Is there enough of a track record to know if the fundamental business model works? Years ago, a company did not consider franchising until it had many outlets operating in different parts of the country. Today it is not uncommon for a fledgling company to begin franchising with only two or three outlets located in the same area. Just because the franchise concept plays well in California doesn't mean it will play well on the East Coast, and vice versa.
8. Does the franchise's management know what it's doing? If the UFOC for a franchise does not contain detailed resumes for each of the key managers, you should insist on seeing these. You are looking to work with people with many, many years of experience in the business, so that when the tough times hit (as they inevitably do) there's a good chance they will figure out solutions to keep you successful.
9. Is my territory the right one for this franchise? A number of "specialty store" franchises I've seen recently base their track records on the concept's success in Europe. There's just one problem. Europeans travel more by public transportation, shop much more on foot, and buy products in several different specialty shops. Americans go everywhere in cars, shop in large stores such as CostCo and Wal-Mart, and want to keep the number of separate store visits to an absolute minimum. If the local grocery store is going to be your biggest competitor, watch out!
Before buying into any franchise, you should visit as many franchise outlets as possible, particularly the really successful ones, and assess their locations with an electron microscope. Do the most successful franchises tend to be located in high-income "yuppievilles," in suburban areas, in college towns or in urban neighborhoods? In areas with a particularly high concentration of senior citizens, teenagers or certain ethnic groups? In shopping malls, strip malls or "islands"? How does your territory stack up against the ideal territory for that franchise?
10. What are your plans for future expansion, and will the franchise system be included in them? Most franchises are reluctant to promise that they will never, ever compete with their franchisees, because they don't really know what competitive and market pressures will force them to do in the future. Still, you don't want to spend a ton of money opening a franchise only to find that your biggest competitor is the franchise itself. Don't be afraid to ask about the franchise's plans:
- Are they planning to open company-owned stores as opposed to franchise outlets? Make sure they can't put a company-owned store in your territory (or within an X-mile radius).
- Will they solicit customers directly via the Internet or a toll-free telephone number? Make sure the franchise will pass on to you any inquiries they may receive directly from customers in your territory.
- Will they offer new products and services through a separate, related franchise under a different trademark? Make sure they grant you a "right of first refusal" for any related franchise's location in your territory or within a X-mile radius.
Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at firstname.lastname@example.org.
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