Disclaimer: This article is for information purposes only and should not be considered as legal advice. It is strongly recommended that any prospective entrepreneur consult a lawyer in order to make informed decisions that could involve legal matters.
More than ever before, prospective entrepreneurs are turning to franchising as opposed to starting independent business ventures—but why?
Simply put, franchising offers safeguards independent businesses cannot provide. While you are not guaranteed success, even in a mature, profitable franchise system, as a franchisee you can capitalize on the reputation of a successful name and business system, lowering your risk in an economic climate where the consequences of failure can be high.
As with any business venture, your chances for success will improve greatly if you plan ahead and thoroughly research every aspect of the franchise system you want to join. By approaching the matter rationally and systematically and consider all factors, you can avoid unnecessary risk and start your franchised career with realistic expectations.
Factor 1: Compatibility
As in any type of relationship, the chemistry between you and your prospective franchisor needs to be right. Even if a franchised business seems very appealing, you must consider your compatibility with its system, product/service and guiding philosophy.
Find a franchise that inspires you
It helps to be truly interested (if not fascinated by) the product or service a franchise offers. If the work is not enjoyable, intriguing or even inspirational, you may struggle to succeed, even in a sound franchise system.
Of course, simply running a business inspires some franchisees. For these people, the product or service itself is secondary. If this sounds like you, make sure the franchisor’s business model allows you to run your location the way you would like. Not all franchisees desire a highly structured relationship and some are surprised by the number of rules they have to follow.
Find a franchisor willing to train you
The more experience you have operating businesses similar to your prospective franchise, the better. However, this does not mean you require experience with the specific product or service being sold. Ask the franchisor’s representatives about any training provided and visit several current franchisees to gauge their opinions.
Initial training is only one aspect of franchisor support. Expect your franchisor to provide ongoing support as needed, including refresher courses and training for upgraded products or services, along with periodic inspections. Also ask the franchisor if it hosts seminars or other get-togethers for franchisees. The franchisor’s answers will not only suggest their level of involvement with individual businesses, but also give you a sense of minimum standards (e.g. design, inventory, equipment, etc.) and performance benchmarks you will be required to meet.
Finally, make sure you have someone to turn to in cases of emergency. Some franchisors will assign you a mentor or coach, while others provide a help line you can call at any time. Be wary if your prospective franchisor lacks these franchisee support services.
Factor 2: Capital
Finding the money for initial franchise fees and capital investments may be your biggest obstacle. However, you shouldn’t see this as a negative. Your financial restraints will eliminate franchisors whose equity requirements are beyond your safe reach. Buying an affordable business allows you to avoid heavy debt from the outset.
Determine your net worth
Even a franchise that seems reasonably priced may still be too expensive for you. Contact your business advisors to help prepare appropriate and reasonable financial forecasts of the proposed business. This is the best way to ensure you cover all of your expenses.
Review your franchise agreement and disclosure document
Having established your net worth, you will need to turn to the disclosure document and franchise agreement to learn more about costs, fees, budgets, financing assistance, margins and royalties. Many franchisors are open to negotiating soft costs (e.g. initial franchise fees) and may allow you to spread out payment for various fees.
Factor 3: System size and strength
The number of locations a franchisor currently has is one indicator of its stability. A large franchise system typically has a proven product or service and can provide you with valuable experience. However, these systems are often very popular and in high demand. As such, they rarely negotiate terms. Conversely, a smaller, newer franchisor could make a great ground-floor opportunity.
Know the franchisor’s history
The number of locations is only half of the story. Franchisors will sometimes buy out or close unsuccessful franchises to remove problems. To learn more, ask the franchisor about its track record, speak with existing franchisees and search the Internet for more information.
Read your disclosure document thoroughly
The franchisor’s disclosure document and marketing materials can provide detailed information on the strength of the franchise system. Clarify the following:
● The franchisor’s overall financial position;
● Projected sales/profits for the franchised location you plan to buy;
● Special insurance requirements (if any), and who is responsible for paying them; and
● Litigation records (i.e. the franchisor’s litigation history, both administrative and civil, including bankruptcy proceedings). Bear in mind any company operating in the public sphere will face litigation from time to time. When looking for red flags, focus on the kind of lawsuit (e.g. fraud) being brought, not necessarily the quantity.
Factor 4: Local market conditions
Before you sign a franchise agreement, consider if the franchise brand is a good fit for your territory and target market. Even a nationwide chain can struggle in certain communities. Marketers and business consultants can develop marketing plans and demographic studies to better determine whether the franchise is well suited for your market. However, don’t believe everything you hear. Talk to real estate agents, other business people and prospective customers to make sure the business will garner interest.
Objectively evaluate the product or service
Look past your enthusiasm and be objective about the quality of the franchisor’s product or service. Ask the opinions of businesspeople, friends and family, especially if they’re part of your target market.
Evaluate the franchisor’s prices
The prices charged for the franchised product or service must be generally reasonable for your customer base and neighbourhood. You may have little flexibility on price points, so consider this carefully.
Judge the competition
You need to know if your territory already has businesses serving your potential clients, even if they are not direct competitors. For example, a quick-service pizza restaurant will compete not only with other quick-service pizza restaurants, but hamburger restaurants and sandwich shops. If it delivers, it will also compete with full-service pizza restaurants and even grocery stores selling frozen products. This will help you determine how crowded the market is and whether your franchise can fit in.
Know your supplier options
The franchise agreement will outline whether products must be purchased from the franchisor or its designated suppliers. If you are required to buy all supplies from one source, the goods may not be the cheapest in the market.
Find a franchisor who will give you reasonable control
Most franchisees own businesses in market with which they are familiar. This has many advantages; in particular, it allows you a ground-level view of any changes going on around you. However, this may not be helpful if the franchisor rigidly applies the same methods to every market. Is your potential franchisor willing to listen to your input?
Factor 5: Location
Though ‘location, location, location’ is an old adage, it is too often ignore by new entrepreneurs.
Seek a franchisor with a site in mind
If you’re new to franchising, your franchisor may help you choose or assist you in finding a site. Either way, you should also retain commercial real estate agents to help you with your search.
Seek a franchisor willing to help you build
The franchisor should also help with construction or renovation of your location; most will put together a list of recommended contractors and tradespeople. These professionals will be established as trustworthy and reliable, and will already be familiar with the specifications your franchise system requires.
Factor 6: Dispute resolution
While almost all franchisors recognize that treating franchisees well benefits everyone, a few are less enlightened. Due diligence should allow you to avoid predatory franchisors and buy into a franchise system with appropriate checks and balances.
Look for franchisee associations or franchise advisory councils
As an individual franchisee, how will your concerns be communicated to the franchisor? Even if you can communicate your concerns, can you stop executive decisions from being implemented? The presence of a franchisee advisory council (FAC) or franchisee association (FA) ensures you have a voice.
Franchisee advisory councils are usually formed by franchisors. The structure can range from an informal committee of selected franchisees, with only advisory capacity, to a large, incorporated organization, with real decision-making power over advertising and other franchise programs. An empowered FAC is a good indicator that any issues you have will be addressed.
Franchisors that fail to effectively communicate with franchisees through FACs are likely to be confronted with a franchisee association. Most FAs are independent, created and controlled by franchisees with their own advisors and commission reports for the benefit of their members. While FAs aren’t always at odds with the franchisor, they are typically formed because the franchisor is seen as indifferent to franchisee needs.
Be patient and read the fine print
Although a win-win relationship usually profits everyone, diverging interests may make a positive franchisor/franchisee relationship difficult to maintain. When relationships get strained, feelings get hurt and disputes occur.
While disputes rarely escalate to the point of litigation, both sides must be prepared. A good franchisor will use clearly worded, standardized contract terms to keep disputes straightforward, predictable and short. Pay close attention to the dispute resolution terms of your franchise agreement, which will outline the means to solve most problems.
If all of this seems overwhelming, don’t worry. In fact, feel confident. Franchisees invest considerable time and savings into their franchise dreams. You shouldn’t follow in their footsteps without a lot of forethought. As you speak to current, successful franchisees, ask them if they ever had doubts when they began. If they are honest, most will tell you they did. However, that doubt simply spurred them to perform due diligence and work their hardest. They chose to enter the world of franchising with open eyes—and you can do the same.