Cutting the Risks of a Franchise Flame-out

There have been all sorts of franchisees who have passed my way. Ones that became wealthy from their franchise endeavors. Some who failed along the way and yet others who struggled month to month to know if they would make a profit, somehow managing for the moment to scrape by. Starting a franchise can be risky business and almost all owners, successful or not, have commented to me that they wished they had done better homework when deciding a franchise. I’m not sure why, but there has been considerable advice to franchise buyers in the media of late. Maybe the Christmas season is bringing out kinder, gentler thoughts and sympathy to one’s fellow man -- inspiring writers to speak of avoiding the pitfalls of franchising. Or maybe it’s just a Christmas thing in which a business writer's thoughts naturally drift towards buying the ultimate toy -- a business for a holiday present. Who knows?

This plethora of holiday advice on how to cut the risks of a franchise flame-out has been edited down to just a few must-read points with some comments added.

Fortune Magazine leads the list of things to consider before buying a franchise in a featured article.

1. Read the Uniform Franchise Offering Circular and have a franchise lawyer review it.
2. Talk to all sorts of franchise owners. Lots of them. Discovery Days and organized franchise visits by the franchisor most likely focuses on the “favorable” franchisees. Those are helpful contacts but you just have to realize who you are dealing with. Those who have failed are also important to know. One franchise owner said, “I learned more from the ones who failed”

Other great insights where provided from another source, the International Sports Sciences Association of all places.

1. Check the market buzz. Consider what kind of need there is for your particular brand of services, and if the brand is growing or diminishing. How savvy is the franchisor in creating marketing buzz? If the franchisor does not have the ability to create one incredible brand for you in your area, alarm bells should go off.
   
2. Cost and financing. What is the total investment – including 12 to 18 months of living expenses for you? Will you get a real leap in purchasing power through the network as opposed to being independent? When is the estimated break-even point and how much of a return on your investment? Are they gouging you with ongoing expenses like royalties, marketing fees, etc? More short-term, can the franchisor assist with financing?
3. Location. Know the demographics of the territory to make sure it will support your franchise location. You might have a killer franchise business but be in the wrong location. Some franchisors will have a breakdown of local demographics of the area and how they are sufficient to sustain your franchise unit. If not, then it’s up to you to do the homework. Do a SWOT analysis of the area (Strengths, Weaknesses, Opportunities, Threats). Secondly, how tight are the exclusive franchise territories? How easy will it be to hire staff where you are at? Are multiple units operated by the same franchisee or by several different owners?
4. Training & Support. How extensive is the training program and what kind of field assistance, ongoing support and marketing support will you receive?

And finally a real gem in the bunch. The above are good general steps of a buyer's due diligence, but how do you get a better sense of the pulse of your future strategic partner’s professional culture and capabilities? Of course, talking to franchise owners of all kinds will help but sometimes franchisees might not choose to see or speak about flaws. Here’s some thoughts from a franchise consultant Dennis Schooley that helps test the professional responsiveness and pulse of your future strategic partner, the franchisor. This helps give you an idea of things to come as far as direction and ongoing support you will receive.

The strength of a franchisor’s qualification system. “Some systems will include a step-by-step system where you will receive information from the Franchisor, and then you will be required to provide some information to them. Once you provide the information, then the Franchisor will send you additional data to help you gain more intimate knowledge…and so on. The reason for that type of system, which I would judge to be ideal, is that each of you is illustrating commitment to the process. This is an important factor for the Franchisor to determine because it is a great indicator to them that you will be able to follow and use a good system to your advantage. That's what Franchising is all about.”

Unified thinking. “You must be comfortable with the Franchising concept itself. It's the Franchisor's strategy to penetrate and dominate a marketplace. You've got to be comfortable with the Franchisor's strategies to do just that. If they make sense to you, it can be a great ride in achieving success together.”

Sources: Hidden risks of franchises , 5 Needed Considerations in Buying a Franchise, 5 Checkpoints Before Buying a Fitness Franchise, Why research is key to business success, Franchises aren't a sure bet, so thorough research pays