The Process of Buying a Franchise
By Michael H. Seid, Managing Director, MSA Worldwide
Even before you start to look for a franchise, there are some serious decisions you have to make. Making a decision to own and operate your own independent business, instead of working for a company, is not something you should take lightly. As a business owner, your success is going to be mainly tied to how well you operate and manage your business and how well you attract and retain your customers.
No one is going to guarantee your success. Therefore, the first question you need to ask yourself is: Do you want to own and manage an independent business, regardless of whether it is affiliated with a franchise system?
Determine if Franchising is Right for You
Let's assume that like many people, you believe the benefits of business ownership outweigh the risks. At this point it is time for a self-evaluation of whether being part of a franchise network is right for you. Keep in mind that while you will own and operate your own business, as a franchisee you will be responsible and obligated, by contract, to operate that business to the franchisor’s brand standards and to only offer the products and services allowed by the franchise system.
You never actually buy a franchise. What you are doing is licensing a brand and an operating system from a franchisor. Think of it this way. If you lease an apartment you may own all of your furniture, but you don't own the building or your apartment. As a tenant, your landlord will place restrictions on how you are able to use the apartment; you will also share the building with other tenants, who are relying on you to follow the landlord’s directions on how you use your apartment. That is how a franchise works. You are leasing a brand and system, and agreeing to follow the terms of the lease (the Franchise Agreement).
Make sure you have a solid understanding of franchising. This website has many articles about becoming a franchisee that you can read to get a basic understanding; you can also pick up a copy of my book Franchising for Dummies. Some of the questions you'll need to answer about yourself include:
- Will you be able to follow the direction of the franchise system, even when you think you know a better way to do something?
- Can you accept that innovations or changes you have in mind, that may absolutely be right for your business in your market, may not be approved by the franchisor?
- If the franchisor evaluates your business and offers you advice or instructs you to make changes to how you have chosen to operate, are you willing to accept that advice or to make those changes?
Franchisees may be independent business owners, but they are sharing a brand with the franchisor and other franchisees. The goal of most franchise systems is that each franchisee operates consistently from location to location. For a true entrepreneur who needs to make their own decisions and chart their own course, becoming a franchisee is not a very good decision.
Choosing the Right Franchise
There are well over 120 different industries using franchising, and several franchisors in each industry subset. That gives you a lot of choice. While the industry you choose should be something you are interested in and would enjoy working in, owning a business is not a hobby. This is an important and sometimes life-changing decision.
Start by gaining an understanding of what types of franchises are available to you. A good source of information can be found on the International Franchise Association’s website at http://www.franchise.org/franchise-opportunities. The IFA is the leading trade association representing the interests of franchisors, franchisees, and professional and other suppliers to franchising.
Other sites that can provide you with information include Entrepreneur Magazine, which annually produces its "Franchise 500" list – http://www.entrepreneur.com/franchise500. While Entrepreneur Magazine is a fine publication, I recommend that you disregard their rankings of franchisors, as that is something best done by yourself during a thorough examination of the franchisor’s offering. Having a high ranking on the Franchise 500 does not indicate that the opportunity will be good for you.
A number of franchise broker firms have listings of opportunities. Some brokers call themselves development agents or sales consultants or just consultants, simply because they don't want you to think of them as brokers. Brokers work for the franchisor and that is where they get the majority of their income, even if you are paying them a small fee. They also represent a relatively small portion of available franchise opportunities. Therefore, while brokers can be helpful, they limit your search only to clients they represent. While many brokers are knowledgeable about franchising, they are not a source of information you should rely on due to the built-in conflict of interest.
Ask yourself some questions:
- What industries interest you? Why? Prioritize them.
- Would you like to operate a retail, service, restaurant, education, children’s, senior’s, etc., type of business?
- What types of businesses would you not want to own?
- Will your family and friends support your choice of business, or will you be embarrassed in some way by being associated with that industry or brand?
- How much income do you need to make to sustain your lifestyle?
- If you are looking to obtain more than one location, does the franchisor offer multi-unit opportunities?
- Will the franchise support your lifestyle – number of hours and days worked, direct or indirect management of the business?
- How much can you afford to invest and risk?
- What are the cash and debt requirements of the franchisor?
- How much money can you borrow if you need to?
Selecting the right industry for you is the most important step in the process. You don't want to miss opportunities you might not have thought of, but you also don't want to spend time looking at industries that don't meet your needs.
Make a List of Franchise Systems within Your Chosen Industry
Your next step is to list a handful of franchise systems that interest you within your chosen industry. Don't make the mistake of using the franchisor's initial franchise fee, continuing royalty, or marketing costs as a screening criteria for which franchisors to consider; the fees you will pay will have little impact on your goals in the real world. Ultimately, you want to find a franchise system that achieves a good income for you and that also provides you with a reasonable return on your investment.
It is the bottom-line results obtained from the opportunity that you are looking for; that determination is only possible if you conduct a proper evaluation or due diligence of each one of the opportunities you have an interest in. Why do you care if one franchisor’s fees are higher than another system, if you are able to achieve better financial results by being part of the higher-priced system?
You've selected the industries and the franchise systems you are initially considering. Now comes the detailed work required.
Due Diligence: Carefully Evaluate each Franchise Opportunity
Conduct a careful evaluation of each franchise opportunity, and take careful notes. Just like looking for a home, after a while they all seem to blend into each other and you can't recall which one had the big back yard or the formal dining room. After a while, that's how you are going to feel when looking at franchise opportunities. MSA publishes a detailed checklist and questions you should consider using in our Making the Franchise Decision workbook, downloadable for free at http://www.msaworldwide.com/franchising-resources/making-the-franchise-decision/.
Contact each franchisor directly. Generally the franchisor will have information on their website about their franchise offering, and a short questionnaire they will want you to complete. Keep in mind that each franchise system may have different requirements to be considered a franchise, and a different process they use in evaluating and selecting franchisees. (Some will simply be selling franchises and will accept anyone with money and interest – so be aware of this also.)
Attend an interview or Discovery Day. Follow the franchisor's process and, if you want to be considered, meet the reasonable requirements in their process. While much of the recruitment process today is by phone, email, website, intranet, etc., at some point you will be asked to attend an interview or what is generally referred to as a "Discovery Day." This is an opportunity for the franchisor to present to you, in detail, information about their franchise offering, and for them to begin their evaluation of you.
Meet the franchisor at their headquarters. This is an essential step for both parties. If the franchise system you are evaluating does not require you to meet with them in person at their headquarters, I strongly suggest you take them off your list and choose a different franchise system to evaluate. Just because you like the salesperson, or because they have a large franchise network or a colorful website or brochure, does not give you any indication of how well resourced the company is to support you as a franchisee. For that, you want to visit their headquarters and meet their management and staff.
During the electronic and face-to-face meetings, use the questions and other information in the Making the Franchise Decision workbook to help you evaluate the franchise opportunity. While it is a lengthy workbook with lots of questions, you should add others that are important to you.
Request a copy of the franchisor's FDD. You are entitled to receive a copy of the franchisor’s Franchise Disclosure Document (FDD) upon request once you begin the franchise investigation, assuming the franchisor has any interest in your becoming a franchisee. Ask for their FDD, and sign and return the receipt page to the franchisor as soon as you receive the disclosure document. That receipt page is important to both you and the franchisor because it sets the mandatory disclosure clock in motion.
Speak to current and past franchisees in the system. A franchisor's FDD will include all current and past franchisees' contact information, which gives you the opportunity to test the franchisor’s proven system claims by speaking directly to those current and past franchisees.
Select a qualified franchise lawyer. After you have done your own independent evaluation of each franchise and have narrowed down the list of opportunities that interest you, it's time to select a franchisee lawyer to work with you in finalizing your evaluation of the opportunity and to help you enter into the relationship properly.
Most general lawyers will not be able to assist you in properly evaluating a franchisor or in completing your due diligence, or work with you to understand and negotiate changes to the franchise agreement, if changes are possible. Franchising is a specialized discipline, and requires an experienced franchise lawyer. Other lawyers generally will not be able to assist you, and because of their inexperience in franchising, may create obstacles in your evaluating the franchise opportunity and becoming a franchisee.
Understand everything in the agreement before you sign. It is important, before you sign any franchise agreement, that you understand in detail the terms of the agreement and what the franchisor is offering. If the franchisor or any of their personnel have made verbal promises to you, make certain those are included in the written franchise agreement. Franchise agreements are detailed documents that generally cannot be changed unless in writing. Some negotiation may be possible, within certain limits.
Take your time in selecting any franchise opportunity. Remember, the franchisor wants to expand, and likely their franchise salesperson will make a commission by getting you to sign a franchise agreement and pay the initial fee. Don't get caught up in the hype – all salespeople, especially in franchising, are gifted in making the sale. It is up to you to make the proper franchise decision for yourself, and to take the time necessary to do so.