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How to Research a Low-Cost Franchise

Does that franchise concept really deliver? Here's how to find out.

This story appears in the June 2009 issue of Start Up.

Markus Romero didn't like crunching numbers or sitting behind a desk; he was busy managing nightclubs and operating mobile tanning salons in Las Vegas. But after he discovered Instant Tax Service, his attitude changed.

Warning Signs

As you dig for information on a low-cost franchise, watch out for these red flags, says Joseph Mathews, co-author of Street Smart Franchising:

Bossy corporate culture. Beware if the franchisor talks about franchisees as if they're children, or if franchisees say they can't get managers on the phone. "If they're like a parent or a benevolent dictator in an ivory tower, run like the wind," he says. There should be a free flow of information, with franchisors valuing franchisees' input.

Underqualified managers. Is the franchise a , with relatives in key roles? Make sure managers have the experience to make franchisees successful.

Franchisors who compete with you. Franchisors often reserve the right to open their own stores on your turf. Ask if they would remove that rule, Mathews says.

Mandatory suppliers. Are you required to purchase supplies from the franchisor? If so, are their rates competitive? Watch out for situations in which you'll be stuck paying too much.
He was so intrigued by Instant Tax's model of targeting low-income tax filers that he took a job as a trainer for a large Instant Tax franchisee. Romero, 36, also grilled other franchisees about their first-year expenses and profits. He found the calculations easy, and he liked helping people get quick refunds. He was impressed that the franchisor offered a first-year buyback program--a strong indication that Instant Tax was confident in its model.

In April, Romero became an area developer for Instant Tax in Albuquerque, New Mexico. He opened his first franchise for just $34,000 and plans to spend the tax off-season helping others open Instant Tax units. His advice to people investigating franchise offers: "Go out, get your hands dirty and see if it's for you."

With banks tightfisted on lending right now, low-cost franchises are attracting a lot of interest, and there are hundreds of them to choose from in every imaginable business sector, from automotive to technology. (About 25 percent of Entrepreneur's Franchise 500® companies have starting costs less than $50,000.)

You'll need to do some sleuthing to find out whether a particular low-cost franchise is really a good business opportunity and if it suits your own interests and skills. Many would-be franchisees skimp on research, making an emotional purchase because they personally use a service or like a product.

Particularly if the franchisor is fairly new, you'll want to dig deeper to learn about the success of the franchisor's concept. Street Smart Franchising co-author Joseph Mathews says, "Find out what their motivation is for franchising. A lot of companies don't have strong businesses, so they get into franchising because the economics aren't good enough for them to expand the normal way."

Don't get dazzled by a franchisor presentation; ask hard questions of both franchisees and the franchisor before signing on, says Mark Siebert, CEO of consulting firm The iFranchise Group. "There's a level of financial analysis that often doesn't happen," he says. "You should assess the risk and possible return."

A key issue to research is how many franchisees have failed over the years. Talk to franchisees and see if they're enthusiastic about how they're treated by the franchisor, Siebert says.

It's also critical to understand what you'll be doing on a daily basis as a franchise operator. Many low-cost franchises, particularly homebased ones, are heavily sales-oriented. Siebert recommends you "ask yourself, 'Am I comfortable selling? Can I sell this product or these services?'"

Elements of Success

When she looked into the Merle Norman franchise, April Walter decided she definitely could sell the 77-year-old beauty chain's products, which have a long-standing, loyal clientele. Though she had used the products herself, Walter, 36, didn't just automatically sign up; she compared several franchise concepts before concluding it was the best fit for her market and her skills as a former HR executive. She opened her Merle Norman Studio in a new regional mall in Macon, Georgia, last October for about $60,000 and projects first-year sales of $170,000.

She was impressed by what Merle Norman had to offer, including three full weeks of training and a franchise fee of $0. The company helped Walter negotiate her lease and design the studio layout. "Merle Norman had three things I was looking for: low startup cost, a strong support system and longevity," she says.

Walter interviewed several franchisees before signing up and was comforted to learn the average tenure was more than 10 years. From frank conversations with franchisees, she learned what the costs would likely be and how long it could take to become profitable. Based on her research, she estimated it would take six months to a year to see a profit. But even in the down economy, she says she was close to breaking even after just four months, thanks in part to her highly trafficked location.

Strength in Numbers

Thorough research is more important than ever in a sluggish economy, says John Reynolds, president of the Educational Foundation. It'll be hard work to land customers when consumers are skittish about purchasing, so you'll want a strong organization that supports your efforts as a franchisee.

"The basics are even more important now," he says. "If it's a small franchise, talk to every single franchisee. This is like becoming part of a family, and you want to know everything about them."

One good way to find out if a franchise offer is a strong one is to compare the offer with those of other franchisors in the same business segment. When Romero looked into tax-preparation franchises, he discovered some of the big names didn't have any franchises available. Others didn't do TV advertising, preferring guerrilla tactics such as sandwich-board ads. Instant Tax supported franchisees with a strong national advertising program that included TV and radio ads, and a national 800 number that would refer prospective customers in his area back to his store.

Once customers come, he says, they usually return the following year and tell friends. Franchisees told him to expect annual growth of 20 percent to 30 percent, but Romero says he's already seeing growth rates that are even higher. His own enthusiasm for the concept is also helping drive repeat business. "I found I like solving problems, putting out fires and creating wealth," he says. "I do that with every client."

Business writer Carol Tice is a regular contributor to Entrepreneur, The Seattle Times and other major publications.

100 Franchises to Start for Less Than $50,000

It's a common misconception that franchising just makes rich folks richer. They say it takes money to make money, but the following 100 low-cost franchise opportunities offer a proven system, brand recognition, training and support for less than $50,000 in startup capital.

Here are the top low-cost franchises, listed in order of their rankings in Entrepreneur's 2009 Franchise 500®. Whether you want to start a cleaning business or tutor the children in your neighborhood, these franchises can make you a business owner without costing a king's ransom.

This list is not intended to endorse any particular franchise company; it's just meant to get you started. You should only buy a franchise after conducting your own extensive research. Be sure to read the Franchise Disclosure Document carefully, contact existing and former franchisees, and consult an accountant and attorney. --Emily Weisburg

Listing compiled by Tracy Stapp

Click here to view the complete low-cost franchise listing.

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