08/ 16/ 2006
Five questions to ask when shopping for a franchise
Running an independent business and running a franchise are two very different experiences. In an independent business, the business owner makes all the decisions, from price points to vendors to marketing strategies. For a franchise owner, many of those decisions are predetermined based on a successful formula. Despite the differences, independent businesses and franchises are alike in one important respect: You have to plan ahead before you take the plunge. You wouldn't open an independent business without a detailed business plan, and the same goes for a franchise. If you're in the market for a franchise, make sure you've answered the following five questions before signing the dotted line.
1. Do you like the work? When buying a franchise, you're choosing among countless options, so make sure the franchise you choose is something you'd enjoy doing. Otherwise, you could end up unhappy--and unable to get out of a franchise contract. Ask the franchiser if you can shadow a franchisee for a few days. When you're with the franchisee, don't forget to ask him or her about the job, making sure you hear both the good and the bad. Another thing to consider is how much work you are willing to put into the franchise. Are you willing to give it your all and be a bona fide owner-operator or are you looking for more of an absentee ownership post? Make sure that your work goals align with the expectations of your franchiser.
2. How flexible is the franchise structure? Many franchisers offer practically free reign when it comes to running your franchise. Others have very strict rules and regulations that could dictate everything from your business' signage to special deals. If you're looking for a franchise that will capitalize on your entrepreneurial spirit, look for a franchiser that gives you the most flexibility when it comes to running your franchise. But if the thought of running a business top to bottom was what turned you away from starting up your own independent venture, a strict structure with little room to roam could be a perfect fit for you.
3. What is the earning potential? Believing in the product or service you're selling is not enough to maximize your earning potential. You also have to consider the protected franchise territory. Protected territories are designed so that competition is minimized between franchisees within the same franchise outlet—ensuring your growth potential--but also ensuring the growth potential for the franchiser. Make sure you find out before you purchase a franchise what your territory will be, how close your territory is to other nearby franchise outlets, if you can market outside your territory, and what you can expect your protected territory and surrounding territories to look like down the road. Most of this information can be found in the Uniform Franchise Offering Circular, which provides detailed background information on 23 components of franchise opportunity, audited financial statements from the last three years and a copy of the proposed franchise agreement.
4. What are the terms of ending the franchise agreement? Another thing to look for in the UFOC is the termination clause, which details the circumstances under which the franchiser can terminate your franchise (What is the franchiser's right-to-buy formula?), and under what circumstances the franchisee can terminate, too. Despite your best intentions and planning, there will always be a host of unforeseeable events, including sickness, death or another emergency, that could require you to move or sell your business. Make sure the franchise agreement gives you this flexibility.
5. Does the franchiser offer financing help? Franchise initial investments can range from $20,000 to $250,000. Most franchisers--and lenders--expect you to put up about a third of that. Where the difference comes from could depend on the franchiser. Many franchise companies offer financial assistance in the form of loan guarantees, property leasing assistance and working capital or, more commonly, they help franchisees find a preferred lender with whom the franchiser has a good relationship. If the franchiser offers no financing assistance, and you expect securing a loan will be difficult, you may have better luck with a franchise that will offer some assistance.
