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So you’ve decided to embark on a new career as franchise owner? Well hold on before taking the plunge and ask yourself what you’re good at and what you want to do after leaving traditional employment. For many, in fact for the majority, the decision will be to investigate and ultimately decide upon one of the thousands of franchise operations available today.
The reasons are simple, most of us lack skills necessary to create and develop a business from the ground up. Many lack the capital required to create and finance scratch development projects and are unable to get bank financing for their yet unproven idea. As well intentioned, motivated and as great as the idea may be, from a lender (bank) point of view a franchise with reasonable fundamentals has less inherent risk than an independent operation and is therefore more likely to be financed.
In many ways a franchisor and would-be franchisee have complementary objectives; the franchisor is looking for organizational and management skills necessary to follow rules and a partner in perfecting the franchisor’s business model in the local marketplace. A franchisor is seeking to exchanges a set of skills, and operating methods for ongoing royalty, advertising fund payments and on-premise ownership. The would-be franchisee is looking for a proven set of operating systems that minimizes the chance of failure which is statistically best served by a franchise.
According to information readily available on the internet 40% of business in the U.S. today is done through franchising. The U.S. Chamber-of-Commerce estimates franchise sales are a whopping two trillion dollars. One out of every twelve businesses in the US is a franchise and the largest chains are household names and yet most domestic franchise operations have fewer than 100 units.
As a former franchise manager for a very large company (over one thousand franchise owners) and one who has owned a franchise, as well as an independent business I am forever amazed how many well intentioned, educated people approach franchising in an unacceptably naive manner. There is nothing more devastating than after years of working for an employer losing it all due to a bad franchise decision. Business failures doom personal finances, may lead to divorce and even death. Determining the right franchise opportunity (20 year commitment or perhaps longer) is similar to selecting a life partner and yet in my experience far too much is taken at face value.
Statistically, there are bad franchise operations even though the Federal Trade Commission receives relatively few complaints. The FTC assumes full disclosure required by every franchising operation called the Uniform Franchising Disclosure Document (FDD) is the reason for low numbers of complaints. People hate to admit failure, particularly when failure is the result of not taking action that might have prevented failure in the first place is another reason for the low number of complaints.
As a prospective buyer (franchisee) you must approach each franchise option with both eyes open and that means making sure you do not become a negative business statistic. Never fall in love with a company, keep options realistic and open. If you wish to open a food operation investigate concepts you can afford. It makes no sense to look at a Wendy's franchise if you have 80K in available cash so don’t waste your time. Narrow the list to four to five franchise operations viable at your investment level.
Soon after your initial franchise contact interested parties receive a (FDD) document, which provides detail about the business and its operation. Content includes financial data, business structure, owners and agents, pending legal actions, a complete listing of each franchise owner with contact information, fees and payment structures, closed locations and a host of other information designed to help would-be franchisees make informed decisions. Never, ever accept anything in this document at face value even though it has a governmental sound of implied legality, everything in this document is open for verification.
Perform what is called “due diligence” on each franchise (more on that in a minute). Remember, you are interviewing them as much (perhaps more) than they are interviewing you. At the first sign of being rushed to sign-up run the other way, they only want your money. This tactic is sometimes used to “protect your territory/specific location”; baloney, this is a money grab pure and simple. One franchisee I know was asked to pay his franchise fee on his credit card; believe it or not he actually did it.
If you do not have the time to perform due diligence hire someone to do it for you, there is no escape for the savvy future business owner here. Make sure your questions receive real answers and not shrouded bits of generality. Never be intimidated by asking difficult questions. Yes, there are limits to what you can be told legally, but never let a franchisor hide behind numbers. Hiding behind confidentiality is not acceptable (more on this later).
Number one, ask your franchise representative (the guy or gal you’ve been dealing with) if he/she is an employee of the company? In today’s world many upstarts do not have internal franchise professionals and instead hire brokers to represent and sell their concept. This is neither good nor bad as long as you keep in mind a broker is another person in the profit equation. Creating the impression a broker is an employee, providing an office along side corporate staff is an effort to add security and sense of “family” to the transaction and is a common practice that could be cause for concern.
There is no better use of time than spending it pursuing information represented on the UFOC; to do otherwise is beyond foolish and increase the chance of your failure. And while the list of possible questions are endless some of the most important are:
1) Is the franchise system being sold the same one reflected in sales and profit on the UFOC? If not, how is financial information different than what is reflected? How many operations are opened for business that reflect this advertised level of investment?
2) Management should be willing to discuss sales volumes, if you find this is not the case it should raise your level of concern. What are sale volume by building type per square foot etc;? How many building categories (types) does the company operate and what are sales by category?
3) Information about key employees, not just officers, turnover percentages, years of service, past employment, number of staff additions, planned additions, all of this is important to any viable, growing franchise. Senior leadership/officers management depth is important since direction comes from these individuals. If this is a multi-generation family owned franchise it is even more important. Just because the company has a long history of success does not mean its success is secure under the direction of a junior family member who lacks experience.
4) Is the company opening any of its own locations (corporate operations)? If not, this is a negative sign that can not be rationalized.
5) I suggest sending a written questionnaire to as many as 100 existing franchise owners. Your letter of introduction might sound something like this. My name is X and I am considering a franchise with your company. If you would complete the enclosed questionnaire and return it in the self addressed stamped envelope it would be appreciated. If you would rather speak with me personally I can be reached at XXX-XXX-XXXX; any comments made either via the survey or orally will be kept in the strictest confidence (leave your name off your written survey if you wish). Information is more important to me than the individual’s name at this point.
6) Ask the franchisor why locations fail. Use a service if necessary to find failed owners since in most cases names and addresses may have changed. (peoplelookup.com is a good one).
7) Ask how the company (franchisor) involves franchisees in decision making. Ask for names and contact information of those filling important advisory positions on committees. Comparing names against the list of all franchise owners tells a lot about the structure of the company with respect to franchisee involvement. The list of committee members should include senior franchise owners and newer owners; mixed representation is always a good idea.
8) What do I receive for my national advertising contribution? Does the fund pay for store/location level support advertising material? Is the company an open book when it comes to marketing and advertising? Is the miscellaneous/unaccounted portion of the national advertising fund (if there is one) 10% or less of the total advertising budget? This account has been the source of personal travel extravagance for family and/or senior management, in essence taking money away from marketing and advertising for what some might consider personal use.
9) Do corporate locations (if there are any) contribute to the national advertising fund?
10) What percentage of opened locations reach break even sales levels? What systems are in place to assist underperforming locations with marketing and advertising support?
11) Do you have methods of rewarding/recognizing excellence within the franchisee community?
12) How are manufacturer and supplier rebates used? This is an important question that needs an answer. You are looking for evidence funds are used to support the brand and not used for undisclosed and at times questionable purposes.
13) How many times each year does senior leadership personally meet with owners once their location opens for business? Is there a formal review process?
14) How many times will my location receive service from the company and what will that service entail? Is there a person assigned to communicate, teach and verify my unit performance? (This is important because a bad franchise operation damages every franchisee.)
The list of possible questions could go on and on almost indefinitely. Ask lots of questions, use answers to fuel follow-up questions. By all means take notes, ask the same or similar questions where they make sense of franchise owners then compare answers, you are looking for patterns of responses not specific negative responses.
Most failed franchisees wish they had completed due diligence in a more aggressive and serious manner. You have the ability, skills and training to make the right decision if you apply hard earned life lessons that have served you in your past work life. Your decision must be based upon skilled investigation. Now is not the time to drop your guard and believe hook-line-and-sinker what you have been told (sold).