The success rate for franchise owned businesses is very high according to the U.S. Department of Commerce. Less than 5 percent of franchised businesses fail, but this level of success doesn’t come easily, and success is not guaranteed. According to the Small Business Administration (SBA), One of the biggest mistakes that you can make is to be in too big a hurry to get into business.
Don’t feel pressured to purchase a franchise that isn’t a good fit for you. You need to conduct a broad study of opportunities to understand what is available, and which franchise is going to be the best business for you to undertake. You need to conduct a Due Diligence process when considering a franchise, just as you would when considering the purchase of an existing business. You will find some guidelines to help you with the process in my article “Buying A Business”.
Perhaps your most important step in evaluating a franchise opportunity is examining your own skills, abilities and experience. The ideal franchisee is a creative, outgoing person who is eager to succeed, but not so independent that he or she resents other people’s advice. Are you this type person? Maybe you think so, but haven’t pursued a self-assessment tool to help you see clearly what skills you have as well as those you may lack. There are a number of assessment tools available, and you should avail yourself of at least one of these.
Then, ask yourself how this decision will affect your family. Do they understand the risks and sacrifices required, and will they support your efforts? Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy and money by you and your family can lead to an exciting and profitable venture.
What Is A Franchise?
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that identification in a business. In its simplest form, a franchiser owns the right to a name or trademark and rents that right to a franchisee. In the more complex Business Format Franchising, a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including site selection, financing, marketing plans, training, and a source of supply to products.
As in all major business decisions, however, nothing substitutes for thorough Due Diligence investigation, planning and analysis of your options. The Small Business Administration recommends the questions below to guide your research and cover all the bases.
What Is The business?
Determine whether the business opportunity would be a successful venture on its own, apart from the benefits offered by the franchiser.
· Is the product or service being offered new or established? Does the business require special skills or aptitudes that you may lack? Do you feel strong motivation for producing the product or providing the service?
· Does the product meet a local demand? Is there a proven market?
· Who is the competition?
· If the product requires servicing, who bears the responsibilities covered by warranties and guarantees? The franchisee? The franchiser? If neither, are service options available?
· What kind of reputation does the product or service enjoy?
· Are suppliers available? What reputation do they enjoy?
Who Is the Franchiser?
Visit at the very least one of the firm’s franchises. More would, of course, be better. Ask for a list of all of the firm’s current franchises and make sure that you select the one(s) to visit. At the very least, the franchiser must provide you with the names of 10 franchises in your prospective market area. If you can visit only one franchise operation, avoid those most recommended by the franchiser, but look to those on the list who were not as highly recommended. These may often give you a better picture of a typical operation, and the feedback from the franchisee may be more reflective of the opportunity.
The Discovery process for franchising is much like the process for any business, except that you need to know what you can expect from the franchiser, and what conditions of operation will be required of you. When you make a site visit, discuss franchisee expenses and ask how well the franchiser supports the franchise units. Does the franchiser actively promote and market the products or services of the franchise? This will help you determine the reputation, stability and financial strength of the franchiser.
Here are some additional questions from the SBA that you should ask:
· How long has the franchiser been in the industry? How long has the firm granted franchises?
· How many franchises are there? How many in your area?
· Examine the attitude of the franchiser toward you. Is the firm concerned about your qualifications? Are you being rushed to sign the agreement? Does the firm seem interested in a long term relationship, or does that interest end with the initial fee?
· What is the current financial condition of the franchiser? Check the franchiser’s financial statements in the disclosure document. If the franchisees are paying their upfront fees but not their royalties, this may indicate that franchise units are being sold to investors but that they fail to open or perform too poorly to pay royalties.
· Who are the principal officers, owners and management staff? What is each person’s background? How much experience in franchising do they have? · Compare sales promises with existing documentation. Be certain that the sales presentation is realistic and that major promises are clearly written into the contract. Be alert for exaggerated claims and pressure tactics.
· For newly established franchises, make sure the franchiser has registered the company’s trademark. If not, the company’s name and logo may have to be altered, forcing you to change your market identity after you have established yourself.
· Verify earnings claims and compare them with other business opportunities. Investigate all earnings claims carefully. Earnings claims must (1) be in writing; (2) describe the basis and assumptions for the claim; (3) state the number and percentage of other units whose actual experience equals or exceeds the claim; (4) be accompanied by an offer to show substantiating material for the claim; and (5) include certain cautionary language. Treat this opportunity like any other investment. Does the franchise offer the return you require? If not, you may want to look at a different business.
· What is the legal history of the franchiser? Have any of the executives been involved in criminal or civil actions? Is any litigation pending, particularly involving any restrictions on trade that may affect the franchise?
· Is the franchise a member of the International Franchise Association (IFA)? If the franchise is not a member, find out why. The IFA has a strict code of ethics that must be met before a company can become a member.
What Is The Franchise Package?
Bring all your information and resources together as you examine the contract. Think carefully about the level of independence you will maintain as a franchisee. How comprehensive are the operating controls? Be very clear about the full costs of purchasing the franchise. Involve a franchise attorney, accountant and/or business advisor as you examine the following questions.
· What is the full initial cost? What does it cover?
· Licensing fee?
· Land purchase or lease?
· Building construction or renovation?
· Starting inventory?
· Promotional fees?
· Use of operations manuals?
· What ongoing costs are paid to the franchiser?
· Ongoing training?
· Cooperative advertising fees?
· Interest or financing?
· Are you required to purchase supplies from the franchiser or a designated supplier? Are the prices competitive with other suppliers? · What, if any, restrictions apply to competition with other franchises?
· What are the terms covering renewal rights? Reselling the franchise?
What Is the Disclosure Document?
The Federal Trade Commission (FTC) requires sellers of franchises and other business opportunity ventures to provide prospective investors with the information they need to make an informed investment decision. It also requires that all earnings claims be documented, that the information investors receive is complete and accurate and that investors have adequate time to consider and evaluate the disclosures before making any final purchase commitment.
All required information is given to prospective investors in the form of a franchise disclosure document, which must be furnished at least 10 business days before any purchase may occur. This document includes 20 important items of information, such as
· Names, addresses and telephone numbers of other franchisees.
· A fully audited financial statement of the seller.
· The cost required to start and maintain the business.
· The responsibilities you and the seller will share once you buy a franchise.
· Litigation involving the company or its officers, if any.
U.S. Small Business Administration (SBA) – The SBA offers an extensive selection of information on most business management topics, from how to start a business to exporting your products. Much of the information contained in this report is listed in their Small Business Directory library.