Americans from all over the country dream of owning their own business. Many of these people look to franchise ownership as a way to realize this dream while reducing the start-up risk and expense. This 3-part series will provide key information on how to evaluate and buy a franchise, along with the steps of due diligence needed to not only begin your journey of business ownership, but achieve it – soundly.
For anyone unfamiliar with franchising, you should understand some of the terminology being used before getting in too deep. This is especially important in this industry, because they use a lot of jargon and abbreviations.
First is the term Franchisor (commonly shortened to “Zor”). In your journey to franchise ownership, you will learn that a good franchisor is a successful business person who sells a model of his or her success, so that others, like you, may reap the benefits of their experience, business savvy, time, and financial investments, and even their failures, thereby allowing their franchisees to avoid the learning curve of mistakes.
Next is Franchisee (commonly shortened to “Zee”). This should not be thought simply as the person who buys a franchise and follows the franchisors rules, you who are buying a franchise are more than that. As a franchisee, you truly are an entrepreneur who buys a business from another entrepreneur, the Franchisor, who has created a successful; proven Franchise system, creates jobs in their local economy, a career for themselves and a vehicle for their own financial future.
Lastly is the infamous Franchise Disclosure Document (commonly shortened to “FDD”). Although it can be an intimidating document, the FDD is a sales and analysis tool, that is required by both state and federal laws. The FDD legal document is required by law to be provided to you at least 14 days before the Franchisor is allowed to accept any money or signed agreements, such as the franchise agreement or an area development agreement. The FDD will teach you how much the franchise will cost, what your roles and responsibilities will be, and what the franchisor must do to help you during the franchise relationship.
Now that you understand the terminology used, it’s time to look at why you should consider owning a franchise.
Many people do not understand the power of franchising. Franchising as an industry does more for the U.S. economy and job rate than any other industry. Although helping the economy and job rate is a noble cause, most people go into business for themselves to be their own boss, to have job stability, or to build something to benefit themselves and their families. Franchising is a great vehicle to make this happen.
During your search for a franchise you should remember three rules: First, make sure the franchisor really does have a proven system that works; second, make sure that you are compatible with that system; and third, make sure you will enjoy following and operating the system for as long as you intend to own the business!
One way to determine whether the system works is to talk with other franchisees of that business. By law, the franchisor is required to list the existing franchisees with their contact information, along with an additional list of former franchisees, who have left the franchise system within the FDD. You should take full advantage of this list; this is where your Due Diligence comes in. Contact many of the franchisees and ask them things, such as what their opinion is of the business; whether they would recommend owning this franchise to others; and if they could do it all over again, would they? And don’t forget to ask the follow-up question behind each “Why?” For example, if they would not do it again, Why not? Their reasoning could cause no trepidation in you at all. Such as “it was my husband’s dream, and we got divorced.” This set of facts should not have a negative or all stop influence on whether you should buy this franchise.
Compatibility with the Franchise System
With the average franchise term being 10 years, you must choose a franchisor that you’re compatible with. How do you know if you are compatible with this franchisor or the franchise system as a whole? You take a Compatibility test. A great number of franchise systems have their own franchise personality/compatibility test. If the system that you are looking at does not have one, feel free to take ours from the authors’ website.
With the average franchise term being 10 years, you must choose a franchise system or industry that operates a business that you will enjoy operating for the full term. That is, if you intend to be a full-time operator of the business, also known as Owner-operator in the franchise industry. If you are not going to be an owner-operator, you should ask yourself if this is going to be a business that I will be proud to own, and am qualified to hire the type of managers needed to run the business on a daily business. However, you should also keep in mind that if a manager quits or is off work for vacation or due to illness, there is a possibility that you could need to step into the daily operational role until the manager returns.
Cost Benefit Analysis
With the above rules in mind, you should perform a cost/benefit analysis of the franchise or franchises you are considering. During your analysis, consider whether the cost of that particular franchise is worth it. Look not only at the cost of the franchise fee, but also the total investment necessary to get the franchise open and operating. Make sure it is not more than you can realistically handle on your own, which we will cover in more detail in our next issue.
You must also consider your lifestyle and family in your cost/benefit analysis. Almost all franchises will require that you attend training at the franchisor’s location for several days to several weeks, depending upon the franchise system. Ensure you can afford to be gone from your family or even your “day job” for this time period. Additionally, owning and operating a franchise will bring new roles and responsibilities to your life. During your self-analysis, make sure that you are prepared to handle the additional responsibilities such as bookkeeping, payroll, regular communications with and reporting to the franchisor, hiring and firing, advertising and marketing, the overall day-to-day operations of running the business, and all other roles that may be applicable. If you are not strong in one of these areas, do not worry because there are franchise systems which allow you to hire managers to help with some of those roles.
Types of Franchises
Now that we have a general idea of the roles to be played in a franchise, you need to consider the types of franchises available to you.
Within all of franchising, you will encounter 2 classes of franchises, the business format franchise and the product distribution franchise. Each format requires its own set of requirements and skills. In the business format franchise, you will use the franchisor’s trademark, trade name, or service mark and be required to distribute the brand’s products or services. You will additionally receive the methodologies and procedures that are necessary for the successful operation of the franchised business, unlike in a product distribution system. A majority of the franchises that are purchased now are classified as business format franchises. Not as common, is the product distribution franchise, which can include gas stations and car dealerships. Product distribution franchises require that you distribute the brand’s products and services, but normally do not require or may not offer the use of the trade name or the trademark. For example, there is a popular BBQ restaurant in Texas that also contains a gas station selling a popular brand of gasoline.
Most people, when asked to name a franchise, automatically think of popular fast food restaurants; but what most do not know is that restaurants only account for about 1 of the 70 industries offering businesses that are franchised. In the U.S. today, there are franchises in all types of industries, from medical to tax preparation businesses and from doggy daycare and pooper scoopers to senior care, just to list a few. Additionally, there are franchises that require commercial or retail leases and those that you can run from your home office. With over 70 different industries to choose from, there is a franchise out there to suit the needs, desires, and skill sets of any would be business owner.
In upcoming articles, I will take these discussions further and give you the tools necessary to further analyze yourself to find out whether you are fit for the franchise life. You will also learn what additional steps are needed to complete your journey to becoming a franchise owner.
For more information or to schedule a customized consultation for your business, you can write to franchising@SLA.Law or call (866) 99-FRANCHISE.