What to Look for When You Check Out Franchises
What do you do when you’ve been laid off or pushed into early retirement? For thousands of Americans, the answer is to start their own business.
Recessions breed business starts for a variety of reasons, said Jon P. Goodman, director of the USC Entrepreneur Program. Some new-found entrepreneurs are “buying themselves a job,” she said. Others just realize that good help is easier to come by and costs are lower when the economy is suffering.
But what do you do when you have neither the inspired idea nor the business plan to start with? You buy them.
About a quarter of all the new businesses that start each year are franchises--authorized spin-offs of somebody else’s idea and business strategies.
Where starting any business is difficult and risky, industry experts maintain that starting a franchise is a touch less so. Investors, who pay a fee and royalties to the franchiser, get a business blueprint that spells out everything from marketing plans to inventory control.
Additionally, potential franchise owners can see how other entrepreneurs have fared with the identical concept by visiting and interviewing those who bought in previously. Franchise offering statements also disclose success and failure rates. No one can guarantee your success, of course, but at least you know how well a particular franchise has worked for others.
However, whether you’ll be successful and happy operating a franchise will largely depend on how closely you consider your own personal aptitudes as well as the differences between franchises. Here are some tips:
* The first thing potential franchisees should think about is whether running a business suits them. Franchising is like working for someone else in that you have to follow someone else’s rules, but in other ways it’s like any small business.
The hours, for example, are often punishing. Some say small business owners work 50% more hours than salaried employees--between 60 and 69 hours per week on average.
If that sort of schedule doesn’t suit you or your family, you’re flirting with a personal or professional disaster.
* Carefully choose the type of business you go into. There are franchises available in about 60 different industries, ranging from fast food to janitorial services to tax preparation, according to the International Franchise Assn.
The type of business you choose will help determine how many hours you must work, whether your family can chip in and whether you enjoy yourself. It is helpful to have some experience in the industry you choose, but it is not usually necessary, experts maintain.
What is necessary, though, is a sincere interest in the field. That helps make the long hours and hard work more palatable.
* Investigate all the franchise opportunities available in the fields you choose. There can be wide disparities between what franchisers offer.
Consider how much support is given. Does the franchiser have a budget for cooperative advertising? How much training does the franchiser provide?
Are there financing options? How long has the franchiser been in business and how many franchisees has he trained? What’s the survival rate of franchisees? And have those who left the system sold out wealthy or bailed out poor?
Often, the franchisers that offer the most charge the most in fees and royalties. You have to determine whether the services provided are worth the difference in price.
* Visit and call other franchisees to see if they’re happy with the support they’re getting and whether they’d be willing to buy in again. (Don’t just call the franchisees that are offered to you by the franchiser.)
* Once you choose a particular franchise, read the offering circular carefully. It should spell out exactly what to expect from the franchiser and what’s expected of you.
You should also visit the company’s headquarters to get a look at its facilities and talk to its management. Buying a franchise is a lot like getting married, said Bill Cherkasky, president of the International Franchise Assn. You have to make sure the chemistry is right.
* Have an accountant and a franchise attorney review the franchise agreement before you buy. Your accountant should be able to determine whether the franchiser is financially sound and able to provide the promised services. Your attorney should be able to spot potential legal pitfalls in the agreement.
* Never submit to pressure. Great franchises sell themselves, Cherkasky said, so high-pressure sales tactics should be considered a red flag.
For a comprehensive list of what’s available, write the International Franchise Assn. for its Franchise Opportunities Guide. The guide, which lists the names, addresses and phone numbers of about 2,500 franchisers, costs $15, plus $6 for shipping. Write IFA Publications, P.O. Box 1060, Evans City, Pa. 16033 or call (800) 543-1038.
