Five Areas to Evaluate Before Going into a Franchise

There’s no question that franchising is a formidable force in today’s economy. The International Franchise Association reports that there are over 760,000 franchised businesses in the United States today, accounting for nearly $1.53 trillion or close to 10% of our nation’s output.

For many, many people franchising has provided a direct path to achieving the American Dream. Still, franchising is not for everyone, nor is every franchise opportunity created equal. So, before you jump on the franchising bandwagon, take a careful look at the following five areas:

I. Will I be happy as a franchisee?

Step back and take a good long look at yourself to determine if franchising is really the right path for you. Ask yourself the following questions:

  • Am I willing to embrace someone else’s system without trying to do it my way or make it “better”?

  • Can I follow someone else’s lead and accept their advice?

  • Am I willing to be part of a network of franchisees, realizing that there may be times when the best course for the network as a whole is not what I think is best for me?

If you can honestly answer “yes” to these questions then perhaps you should continue to explore franchise opportunities. However, if you have a true entrepreneurial spirit, if you want to do things your own way and can’t resist the temptation to tweak a little here and there, or if you believe that you really do have a better secret recipe, then you will probably be much happier on your own.

The second part of this question is whether your family will be happy with you as a franchisee. Starting any business requires tremendously long hours and hard, hard work --- and there’s always the very real risk that things will not go as planned and will not work out in the end. Without the support of your family you are making a hard job even harder.

II. What is your exit strategy?

Although it may seem counter-intuitive that when you embark on a new business venture you first try to figure out how you plan to get out of the business, knowing where you want to end up and when you want to get there is essential in making the decision to become a franchisee and which franchise to purchase. Your primary concern will be to ensure that the franchise agreement you sign provides you the opportunity to exit or continue the business in accordance with your plans.

III. Is there a market for the franchise you want?

It’s important to have a business you enjoy running, but it’s essential to have a business that meets consumer demand in your market area. Selecting a franchise solely because the concept is a hobby of yours or you read somewhere that the concept is “hot” may not result in a successful business. Take an objective look at the area in which you wish to locate your business, and make sure that the consumers in this area share your interest in the concept. What’s more, make sure that they have both the desire and the ability to become your loyal customers in numbers sufficient to fuel your bottom line. Do your homework and don’t get caught up in the hype of the moment.

IV. How strong is the franchisor?

Not only is it important to select the proper business, but you must also select the right franchisor. Put aside the emotional “I want one of these” or “If I don’t buy it someone else will and my opportunity will be lost” - step back and take an objective look at the strength of the franchisor. The Franchise Disclosure Document (FDD) will tell you a lot of what you need to know to make an informed decision, take the time to read it cover to cover. It’s also important to have an attorney and an accountant familiar with franchising review the FDD and the agreements that you will be signing. With their understanding of franchising, they can answer your questions and point out where your agreement differs from common practices in franchising.

You’ll also want to talk with other franchisees in the system and those who have left the system. From them, you’ll learn whether the franchisor has lived up to their promises, if their business has met their expectations, and if they’re happy being a part of the franchise system.

V. How much money can you make?

Making money is the primary motivation for most people looking at buying a franchise. You will want to do your own projections of the start-up costs, on-going costs and potential revenues. The franchisor is limited by the FTC Rule in providing financial information to prospective franchisees. The only information they can provide to you regarding income can be found in Item 19 of the FDD. Make sure you read and understand Item 19. Cost information is found in Items 5, 6, 7 and 8. Read and understand the information in these items and pay special attention to the notes explaining these numbers. Use this information to do your own business plan and financial projections.

Finally, remember that you are entering into a long-term agreement. Regardless of what all your research tells you and in spite of your financial projections, your future happiness rests to a large extent on whether or not you are cut out to be a franchisee and whether or not you like the franchisor and their staff. Do you believe they will provide the leadership and support you need as a franchisee? If you can’t answer yes to these questions, then you should consider looking at additional opportunities.

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“I have known Michael for almost 20 years and he is as knowledgeable about franchising as anyone in the industry. His approach is pragmatic, creative and strategic. When I need guidance or advice in franchising, I go to Michael."

Peter Hoppenfeld, Principal
Peter Hoppenfeld, Attorney At Law
 

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