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Buying A Franchise: Some Do's & Don't

Written by: John R. Wilson, Sr.

Article Overview: Life has a way of manipulating the circumstances and the conditions. Often executives and those vulnerable to economic downturns turn to consideration of business ownership. I'm often asked when I speak to groups, "Are there some hard and fast rules of doing a proper examination or investigation of the various kinds or brands? Can you better understand the business if you do certain things?" The answer is mostly yes. The more you actually know the more confident you are once you make a decision. But there are dangers as well. Often we study so much the line becomes blurred between what is factual and actual and what is someone's overly blustered and inaccurately stated opinion or random thoughts. Here are some things I recommend to you that you DO:

Buying A Franchise: Some Do's & Don't

1. Investigate franchise opportunities by getting first-hand information. By visiting a franchise trade show or contacting a franchise consultant or broker you will get direct information; point A to Point B. Don't start by studying the fringes.

2. Talk to the present owners of the franchise. Ask them how pleased they are with their decision, are they progressing as anticipated, what were the surprises and would they do it again. Inquire if the franchiser is responsive to their needs and whether the training was adequate. It is important to determine the integrity of the franchiser in following through on promises to provide strong initial training and to supply immediate technical assistance when problems arise. Find out what the top values they are receiving as a franchisee.

3. Consult professional and seasoned franchise advisers as opposed to just anyone who is willing to provide an opinion. I would include a small business CPA amongst your advisors. If you do not have one ask the franchisees themselves. On the legal side you will find most franchisee's have not used a lawyer simply because franchising is so highly controlled and regulated. If you feel you want a lawyer make sure it is truly a franchise attorney. Franchise law and business law are Venus and Mars. Don't pay your attorney to learn franchise law by having him come in and make you look like an idiot to the franchise companies because they want you to demand changes that cannot be made.

4. Read the Franchise Disclosure Document (FDD) with understanding. This is where having a franchise consultant can be a great help. A seasoned professional will be able to let you know what is standard, boilerplate franchise language and what you need to be sensitive to. Most often you need to be sensitive to Items 3,4, 5, 6, 7 and 19 and recognize the rest relates to general business standards.

There are exceptions however. The good news is that an FDD is written in fifth grade English and is free of all legal jargon. You will be able to read it and understand it. That "easy-to-read" too is a mandate by the Federal Trade Commission (FTC) and must be adhered to by the Franchise companies when they develop their documents. And, just so you know, the Federal Trade Commission requires all franchisers to supply prospective franchisees with a FDD at least 10 days before they are presented with agreement documents.

I will create an entire blog to the topic of reading and FDD soon.

5. Use a franchise consulting service. Franchise consulting services earn their keep by doing two things that make the life of a potential candidate easier. First, they evaluate franchise companies. It is critical for the consulting firms to understand the level of success and the profile of the best franchisees within a particular franchise companies system. How else can they provide that company with the right potential candidates? You can see how this serves your interests as an investigant.

Secondly, they also assess the candidates to determine their strengths, skills, education, prowess, passions and interests. The combination of those assessments creates powerful synergy for success. With our technology today there is no need to study thousands of franchises to reduce it down to a few. Allow the experts to do what they do best and assist you in your efforts to find just the right company.

6. Compare other franchise systems in the same field. Look for franchises that are solidly managed, well financed, and are positioned in a growth industry. Investigate any regional franchises that are doing well but have not yet gone national in their distribution. Remember, the biggest is not always the best. The biggest franchises may also reduce your chances of success and growth because the territory and sites available are limited. Look for businesses that have a record of success that have recently begun to franchise. Remember, the franchise could be new but the parent business could be 3, 5, 10 years old or more and be rock solid.

7. Evaluate yourself and see if franchising is really for you. Franchisee, regardless of what you think you read in an FDD or franchise agreement is simply another name for independent businessperson. Nobody from "Headquarters" shows up to open your doors of business each day. If it is going to get done YOU and YOUR staff who are the ones to get it done.

Most people aren't ready for business ownership mentally or emotionally...at any level. They can't imagine paying a fee to someone so they can "maybe" make a living. Can you see how if you start with that thinking you aren't even in the same game as a business owner?

No, if that is you, come back once you realize what business ownership can provide to you.

If you are not ready for franchising I guarantee you will suck at being a fully independent business owner where everything is your responsibility (Operations, Training, Hiring, Marketing, Sales, Administration, Finance, Accounting, Technology, Visionary Assessment, and MUCH more). Franchises provide you the guidelines for all of that and much more without requiring you make key decisions in areas you are not expert at.

8. Count the cost associated with entering into the business.I was never concerned with anything about the finances but three things: Do I have the liquid capital to invest in this business that I deem as reasonable and prudent for my life situation? Will it provide me with the kind of living I would anticipate based on the investment level and my personal needs? Will I have a salable asset when the time comes for me to exit the business and will I be pleased with that potential selling price? Most of the thinking processes need to be on the first item. Only put out in liquid capital what you want to afford and only sign off on a business where the full investment is in your comfort zone as well. Most businesses have a financeable component plus the cash needed. Make sure you understand them both.

9. Check the history and experience of the franchise's officers and managers. The FDD in Item 2 contains a disclosure of all officers, their experience, business history, criminal or material civil litigation currently pending or completed against the franchiser involving any alleged allegation of fraud, misrepresentation or any violation of the franchise laws. This explanation goes back 10 years and includes any business dealings they have had that relate to the current business. If you find one with little or no litigation, mediation or arbitration it tells you the officers of the organization view business practices on a personal level and are not prone to throw lawyers at you when disagreements occur...and they will occur.

10. Research, research, research. Buying a franchise is a significant life decision. It is up there with Marriage, Buying a House and Having Children. The difference is you didn't take nearly as much time or concerted effort as you will on this one. More good news is that all the information will be delivered to you. The more professionally you go about your investigation the better your decision is likely to be and the less risk you will be exposed to. Ultimately it is your decision to choose or not choose a business. At the end of the day make sure you have as much personal confidence your choice will provide your expected potential outcomes.

Here are the things I recommend that you DON'T:

1. Shotgun approach to your investigation. Keep things in order. Understand the business components of the business, within their categories, thoroughly. Review the market the business is in. Review the FDD and your relationship with the franchise company. Go through a high level discussion on training, operations, marketing and sales. Spend time with franchisees to get an insiders look at the business. Take what you've learned and assemble it into a plan and perhaps a business proforma.

2. Overextend your finances. Establish a budget prior to your investigation. The budget should be based on your comfort level of investment as well as your comfort level relating to how much credit you are willing to extend. You may be able to afford 2 or 3 or 5 times more than the actual costs associated with a business but the key is what you are willing to extend yourself to do. By the way, just so you know, the more established a franchise, the less risk it "might" carry but the higher the investment needed. The McDonald's, Kentucky Fried Chicken and Pizza Huts now require steep investments. Even some well established home-based franchises may have royalty fees that are steeper because they've earned the privilege of higher earnings for the corporation. Always plan for more expenses than you think you'll have and typically in a start up franchise that might be $10-50,000 more than stated. This is where talking to the franchisees helps.

3. Skip consulting the professionals. Skimping on a good small business CPA and their fees or a seasoned franchise consultant will deprive you of critical information. By the way, most franchise consultants cost you nothing. They are paid by the franchises. You pay not one penny more than you would had you gone directly to the franchise.

4. Take just anyone's word. It's your risk and opportunity. Learn of current marketing trends within industries that indicate potential opportunities or weaknesses such as price wars or huge fluctuations in raw material costs. Also, try to know how economic factors and changes in the society (e.g. aging population) could potentially stimulate or affect any specific industry. I do not care if Uncle Sal once owned "one of these." No he didn't and you are not Uncle Sal. Keep it objective!

5. Settle. Get the business that will provide you with the level of satisfaction you desire. The business you want may be a compromise from your passion but ultimately will satisfy your needs both professionally, personally and financially.

If you are looking for a business and franchising is a good place to start, I hope you find this general information of interest. My firm works with a number of franchises and profiles and reviews candidates on a daily basis that we present to them. Give me a call and let me know if Wilson Associates can be of service to you individually.

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Article Tags: boilerplate, br 2, br 3, business standards, disclosure document, fdd, franchise attorney, franchise companies, franchise consultant, franchise disclosure, franchise law, franchise opportunities, franchise trade, franchisee, franchiser, general business, information point, initial training, strong talk, venus and mars



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