Five Tips for Choosing the Right Franchise
Before making that all important decision in choosing a franchise, here are five tips that can help you avoid making the wrong choice.
Tip 1: Fully Understand the
Implications of Buying and Operating a Franchise.
There are advantages and
disadvantages to owing a franchise and although franchising is a proven
business model, buying a franchise is not a guarantee of success. Many
individuals purchase a franchise with the expectation that the “cookie-cutter”
nature of a franchise program insures success. Operating a successful franchise
takes hard work and in many cases lots of “blood, sweat and tears.” It can take
a year of long hours before a franchise becomes profitable or reaches
break-even. This is often the rule rather than the exception.
Also, be prepared to give up
some freedom, since operating a franchise involves compliance and the
willingness to follow the franchise “program.”
Tip 2: You Should be Able
to Lose Some of Your Investment
Although this may appear to be a
pessimistic or negative thought, don’t mortgage you and your family’s financial
future by investing everything you have in a franchise. A frequent cause of
franchisee failures is insufficient working capital. When doing your business
plan and financial projections be sure to factor in the need for added working
capital. The Franchise Disclosure Document that is provided by the franchisor
includes an Initial Investment schedule. The Additional Funds entry indicates
an estimated three months working capital, which is above and beyond the other
expenses you’ll incur in starting up your franchise. Three months is a short
period of time for starting up any business. Don’t make the mistake of
underestimating your working capital and personal financial needs when
selecting a franchise and be sure you have a financial cushion.
Tip3: Confirm that You Have
the Aptitude and Attitude to Operate the Franchise
There are over 2,500 franchise
opportunities for sale and as such there are different skills required for
different franchises. Some business service franchises require strong selling skills
while a food or restaurant concept may require strong organizational and
management skills. When considering most franchise opportunities a good rule of
thumb is: If you can’t do the work don’t buy the franchise.
Do an objective inventory of
your skills and personal profile and when you’re finished seek the advice of
family and friends to confirm the results. (A number of franchisors do
pre-selection testing of franchise candidates) This process can help you better
match your skills with the requirements of the franchise. Keep in mind Tip 1.
The last thing you need is to work long hours in a business you don’t like and
have difficulty operating. If in doubt spend a day or two with a franchisee so
that you can get a feel for the business. Make sure you have the ability to
implement and operate the franchisor's program, to work hard and to persevere
until success is yours.
Tip 4: Speak to as Many
Franchisees as Possible and Ask Lots of Questions
The best source for evaluating a
franchise opportunity is an existing franchisee. Before you make that final
decision you be sure to speak to a number of franchisees, including some who
have been terminated. Existing franchisees can tell you everything you need to
know including the level of support from the franchisor and whether the
franchisee has achieved their financial expectations. If you do a simple search
of the Internet you’ll find suggested questions to ask. From the FTC to various
State sites, there is no lack of information, when it comes to the kinds of
questions to ask franchisees. Finally, when speaking with franchisees keep
digging until you get the information you’re seeking.
Tip 5: Use a Franchise
Attorney to Thoroughly Review the Franchise Agreement
The franchise agreement is a
binding legal contract that favors franchisors. It contains obligations and
requirements that will bind you to operate the franchise in a specific manner.
Some provisions in a franchise agreement are not easily understood by a
non-professional. In point of fact, an attorney not familiar with franchise law
may inadvertently overlook a particular provision. Once you sign the franchise
agreement including personal guaranties and the acknowledgement agreement you
will have very little “wiggle” room unless the franchisor patently abuses its
franchisees. From a franchisee perspective the agreement will set forth the
services and support that the franchisor is obliged to provide. Make sure you
understand what you’ll be receiving and when in doubt seek clarification.
If the franchisor makes any
representations that are important to you be sure to obtain this information in
writing.
In conclusion, there are a
number of steps involved when seeking, evaluating and purchasing a franchise.
To enhance your probability for success, be sure these Five Tips are included
as part of your franchise process.