When people decide that they want to leave the corporate rat race and build their own business, they will often be faced with the choice of whether to purchase a franchise business rather than start from scratch. Franchises offer many attractive attributes including a business model that is already proven to work and much of the initial work already done. There are, however, a number of critical questions to get the answers to before you settle on purchasing a franchise. Here are ten important issues to consider:
Do You Love The Business? You will be living and breathing this business 24 hours a day, 7 days a week so it better darn well be something that you love to do no matter what it is: cleaning houses, flipping burgers, preparing taxes or any other franchised business you are considering. If you think that because it happens to be a good money maker that it will be enough to make it succeed, you’ll be sorely disappointed. It will be essential to learn all aspects of the industry and truly enjoy the principal business. Without that entrepreneurial passion, the business will be doomed to fail.
Do You Have The Money? To get the advantage of a proven business, you will have pay a sizable initial fee. The question is, are you willing to bet the farm on this business? If you do, the next question is do you have the resources to pay your household bills until you start making money from the business? Even with a franchise, it can take a fair amount of time to bring the new business into the black. There is no guarantee of instant success in any business, no matter what the slick franchise salesperson tells you.
In addition to franchise fees, you may also be required to invest in real estate, renovations, inventory, insurance, and licenses. And the list goes on. You may also have to contribute to advertising costs and to pay ongoing royalties, even if your sales fall below expectations.
Are You Willing To Put In The Required Time? While there is the impression that a franchise makes the business a lot easier, owning a franchise will not mean living on Easy Street. You will be responsible in full or in part for all the business details including advertising, accounting, bookkeeping, customer acquisition, complying with Federal, state, and local laws and regulations, employing and supervising personnel, dealing with complaints, and reporting to the owner of the franchise (the “franchisor”). All these means that you will be working far more than the 40 hour work week at a standard company.
Have You Done Your Research On The Franchise? Just because a business is trying to franchise doesn’t mean that it is a good deal. You should know how long have they been in business, whether the executives are experienced, if the brand name well known, whether you will you receive a license to use the trademark, what, if any, complaints have been filed against the franchise with the Better Business Bureau or any State attorney general to name just a few. Without deep and thorough research to know the most minute details of the business, you are setting yourself up to fail and lose a lot of money.
Have You Consulted A Lawyer And An Accountant? While there are many things that you can do on your own, purchasing a franchise is one time you will want to hire someone familiar with the documents involved so you know exactly what you’re getting into. The Federal Trade Commission requires franchisors to give you a large, complex disclosure document (usually called a Uniform Franchise Offering Circular or UFOC) before you pay any money or sign papers. It’s in your best interest to have a skilled franchise advisors to review all the documents, especially the contract and the financial statements.
Have You Talked With Other Franchisees? When you receive the disclosure document, it will list the contact locations of all the other franchisees. It’s important that you take the time to visit them in person and talk to the owners. You want to confirm that all the information that you have been hearing from the franchisor is accurate and the franchisees will be in the position to tell you. You will want to know if they have they been happy with the amount of training and support they receive and how are they doing financially for starters, and to confirm any other information that you have heard.
What Training & Support Will Be Provided? The amount of training (and the costs associated with it) a franchisor gives varies quite a bit from company to company. You need to know that you will be able to get the training and support you need to make the business a success. This is especially critical if you are new to the particular type of franchised business.
Do you Understand the Restrictions? Since you are essentially paying to use a brand name that someone else spent time, money, and effort to build when you purchase a franchise, you are required to give up a significant amount of control over your business. Most franchisors require strict adherence to their specifications and rarely will they make exceptions. You may need prior approval of your proposed location. You can’t wear a different type of uniform because you think it looks better, and you can’t make the Golden Arches a different shade of yellow. Your sales territory may be restricted and your hours of operation may not be flexible. If you are the type that has a problem following rules (especially when you think you have a better way of doing it), a franchise is probably not for you.
Do You Have Realistic Expectations? You need to take what the franchisor sales people say with a grain of salt. In an effort to sell you a business, some franchisors may emphasize how much you can earn or how well their other franchisees are doing. If they make statements that you are counting on in your calculations to make the business work, make sure that you get written substantiation of any of these claims. In addition, you need to do thorough research of your competition and what plans they may have.
Do You Have An Exit Strategy? When you purchase a franchise, you’re committing to a long-term venture. The franchise agreement you sign will typically commit you for 15 to 20 years. When this time is up, there is no guarantee that the franchisor will renew it on the same terms, or at all. If you breach the franchise agreement, the franchisor may terminate it earlier, and you may lose your initial investment. You need to keep these facts in mind in deciding if a franchise is the best business for you.
If you are confident in the answers to the above questions, then a franchise may be right for you. It can be a fabulous opportunity for the right person, at the right time, in the right business. For more information on franchise businesses, read the Federal Trade Commission’s publication Consumer Guide to Buying a Franchise. You can also find more detailed information at franchise.com and franchise.org
- written in conjunction with pfadvice contributing writer Valerie S. Johnson