What’s Next? What You Need To Do Before Investing in a Franchise
You’ve given it a lot of thought and carefully considered the alternatives. You’ve decided you have what it takes to succeed. You want your own business. More specifically, you’ve decided you want a franchised business.
What do you do next? What can you expect from franchise companies? How will you know when you’ve found the right one for you? Let’s deal with these questions in the order that you’ll face each issue.
BEFORE YOU BEGIN
The first step is to carefully evaluate yourself. What are your strengths and weaknesses? What do you like to do and what makes you happy in a work environment? What makes you unhappy or frustrated? Do you like sales, working with customers, managing employees? Are you technologically up-to-date and comfortable with change? What is your tolerance for risk?
Next, list the characteristics that you want in a franchise business. How important are financial results? What are your realistic investment and income goals for a business? What are your feelings about risk and status issues? How many hours per week are you willing to work (and what schedule do you want to have)?
The answers to these questions will tell you what you need to find in a business to match your preferences and desires. You’ll have a picture of what the future will be like for you as a business owner. Now you just need a process to find and investigate individual franchise companies and determine if they fit perfectly into your plans.
FINDING FRANCHISE COMPANIES
There are many sources of information concerning franchise opportunities. These range from books and periodicals to advertisements to a wealth of sites on the internet. There are thousands of possible franchise opportunities for you to consider. Just sorting through all these options can be a daunting task.
The first step should be using a strategy to rapidly narrow down these possibilities. Consider the characteristics you’ve identified above. Look at industry groups or sub-groups first rather than individual companies. At a glance, does a particular industry group appear to match the characteristics that are important to you?
For example, let’s say you’ve decided that you want a franchise that will involve working normal business hours, that will have very few employees to manage and that will have a total investment of $100,000 or less. These criteria will cause you to eliminate many retail and food franchise industry segments due to issues with hours and employees. You can then further reduce the mix through looking at investment requirements.
If you don’t want to do this yourself, use a franchise consultant to assist you (many offer this service for free). The bottom line is that you need to find companies to investigate that appear to have what you are looking for. The alternative is wasting a lot of time and effort. Once you’ve identified some companies that look attractive on the surface, it’s time to learn more about them.
Step One – General Information
The franchisor will begin by providing you with overview information on the company (typically a brochure and video package). They will then ask you to provide them with additional information on you (by filling out a questionnaire) to determine if you have the general characteristics that they are looking for. Assuming that each party is still interested based on this information exchange, you will proceed to the next steps.
Step Two – Franchise Disclosure Document
This document, commonly referred to as the FDD, is the F. T. C. mandated disclosure document that gives you a wealth of information about the franchisor. The form and composition of the document is standard with any franchisor and must include information on a variety of topics of interest to you. The major subject areas include:
1. The history of the franchise and its officers and directors.
2. A complete description of the business to be franchised.
3. All costs and fees that you will be subject to under the agreement.
4. All obligations of either party to the other during the term of the agreement and thereafter.
5. Any relevant litigation history of the company or its officers.
6. Any business failures, ownership transfers, franchise agreement terminations or other information relating to the success rate of the existing units in the system.
7. Audited financial statements for the previous three years for the franchise company.
8. A list of the existing franchisees.
9. A complete copy of the actual franchise agreement document (this may be provided under separate cover at the option of the franchisor).
A few franchisors also include an earnings claim in the FDD document. Though they are not required to do so, this can be a real time saver for you if it is included. Even if it is included in the FDD, it is still imperative that you discuss this subject with franchisees during your fact-finding calls and visits.
Step Three – Franchisee Calls and Visits
The most valuable source of information on any franchise system is the existing franchisees. Whatever you find the prevailing attitude of the existing franchisees on any issue to be, it will almost certainly be your attitude on the issue if you decide to become a franchisee. Visit with a sufficient number of the existing franchisees to ensure you have a sense of the prevailing attitudes of the group.
Though you want to find that most of the franchisees are happy and supportive of the franchisor, sometimes they’re not. Listen to any complaints, but also try to determine what makes this franchisee different from the rest. If you find you identify with the positive ones, then you should be fine. If you find that you are more like the person who is unhappy, however, this is probably not the right franchise for you.
The following list covers the principle areas you want to investigate during these calls:
Training Programs – How well do the initial training programs and support prepare the franchisees for opening and running their business?
Opening Support – How easy did the franchisor make the process of getting the first unit open and operating?
Ongoing Support – How effective is the ongoing support of the franchisor in terms of helping franchisees deal with the everyday problems of running their business?
Marketing Programs – Most franchisors collect marketing dollars from every franchisee into a pool that is spent to promote the brand. Are the franchisees supportive of the way this process is handled?
Purchasing Power – Does the franchisor use the collective buying power of the total system to get discounts on supplies and inventory beyond what an independent operator could achieve?
Franchisor/Franchisee Relations – Is the franchisor supportive, caring, focused on their success, responsive, effective, organized, and trustworthy?
Investment – The FDD will give you a wide range for the total investment required. Use the franchisee discussions to narrow that down to a reasonable and conservative estimate of how much capital you will need.
Earnings – It is critical that you have a strong sense of just where the average unit is in terms of earnings. How much money does the typical unit make? How soon does a typical unit start making money after opening?
t is always a good idea to bring up the subject of earnings as the last point in your franchisee visits. Most people are reluctant to discuss their income with strangers and you will find the franchisees are more willing to cover this subject after you have spent some time visiting with them. At that point they know you’re not a competitor trying to get information but rather a serious prospective franchisee who will need the information to proceed.
Step Four – Meet the Franchisor
At some point in the process of investigation, you will want to have personal meetings with key personnel of the franchise company. This might be possible in your local market or you may need to travel to the headquarters of the franchisor. Many franchisors facilitate this need by holding what are referred to as “discovery days”. These are structured events where you can go to a specified location and know that many of the key franchisor staff will be available.
Be sure to get to know those people you will be working most closely with in the building of your business. You would expect the President of the company to be an impressive person but that’s not who will be answering your call when you have a problem. Find out who will be providing the operational support and training directly to you and form an opinion about their competence. Make sure that any remaining questions or issues you may have are addressed at this meeting.
Step Five – Make a Decision
If you have been diligent, the entire investigation process outlined above should have taken about two to four weeks to complete. You have now finished your investigation and have all the information you need to decide if this franchise is right for you. It either is or it isn’t, and you’ll know. In either case, it is time to make a decision and move on. If this company has everything you wanted, do it. If it doesn’t, eliminate it and move on until you find the franchise that’s right for you.