5 things you need to know before you make the big decision about going into franchising.
By Don Simon
Go to any strip mall or shopping center and you will no doubt see them: franchised businesses. Subway, The UPS Store, Curves, McDonald’s, Super Cuts, etc. With uncertainty in the job market still lingering and the age of retirement ever increasing, more and more people are looking at being their own boss. In such a situation, one generally has two options: starting their own business from scratch or buying an existing one. Franchising offers a third option: a brand-new business based on an established concept.
What is a franchise?
Simon Says: A franchise is a legal and commercial relationship between the owner of a trade name and a business system (franchisor) and an individual or group wishing to use those in exchange for a fee (franchisee). The franchisor, through a franchise agreement, governs the method of conducting business between the two parties. A franchisee sells goods and/or services supplied by the franchisor or that meet the franchisor’s rigorous quality standards.
There are primarily two forms of franchising: 1) product/trade name franchising, and 2) business format franchising. In product/trade name franchising, a franchisor owns the right to the name or trademark and licenses that right to a franchisee. Business format franchising, the more complex of the two, involves a broader ongoing relationship between the two parties.
How do they work?
Simon Says: Franchisors provide a full range of services to franchisees. This includes lending business expertise (e.g., site selection, training, marketing plans, financing assistance, etc.) that otherwise would not be available to the franchisee. Franchisees use franchisors’ trade names, pay royalties, help expand the business and bring the entrepreneurial spirit and drive necessary to make that franchise successful.
Franchising contributes greatly to our nation’s economy. According to the International Franchise Association, a leading education and advocacy group, there are close to 800,000 franchise establishments in the U.S. Most of those are in the quick-service restaurant, personal services and business services categories. More than 8 million people are employed by franchised businesses. And franchising represents nearly $500 billion of our nation’s gross domestic products.
Should I do it?
Simon Says: It’s important to understand your reasons for going into business and to determine whether owning a business is right for you. If you are concerned about the risk involved in a new, independent business venture, then franchising may be the best business option. “Franchises have a much higher success rate,” says Joe Mathieu, an Acti-Kare franchisee in Overland Park. “That is one of the reasons I decided to go that route rather than venturing out on my own.”
But purchasing a franchise is like every other investment in that there’s no guarantee of success. One of the biggest mistakes a would-be entrepreneur can make is to jump into a business without first doing the necessary and proper due diligence.
Here are a few things to consider about franchising:
1. Look within. This goes beyond figuring out if you have the time and money to start a business. Think about what you really want to do. Make a list of your skills, interests, strengths and weaknesses. “Look for things you like doing the most and what you don’t like,” says Marcie Olinger, self-employment and business coach. She goes on to say would-be franchisees should think about whether they have the motivation to work in this business for the next five to 10 years. Olinger also says they should consider their willingness to follow someone else’s business system and stringent rules for that length of time.
2. Look at your personal finances. It may be three to six months or longer before the franchise starts paying for itself and another three to six months after that before it starts paying you. There’s no doubt about it: your personal finances need to be in order. How much can you invest? How much can you afford to lose? Will you need financing? Do you have savings or additional income to live on while the business gets started?
Finances were a major deciding factor in Steve Brown’s decision to not purchase a franchise. “I wasn’t sure I wanted to work that hard with the level of financial commitment needed at this stage in my life,” he says. Brown, who in his early 50s, decided instead to start his own property management company with a friend from scratch.
3. Look at the market. Think about the demand for the products the franchisor offers. Research how many competing companies sell the same or similar products. Do they offer them at similar prices? Find out how well established or widely recognized by name is the franchisor. How many units are already operating in your area?
4. Look closely all the legal documentation. The Federal Trade Commission requires a franchisee be supplied with a Franchise Disclosure Document (FDD) prior to signing a franchise agreement. The FDD contains various disclosures such a description of the franchise system, what the franchise, royalty and other fees will be, any territorial restrictions and a list of current and former franchisees. It also contains a copy of the franchise agreement. It is imperative that a prospective franchisee read the entire FDD and seek a lawyer’s assistance with anything he or she does not understand.
5. Look at current and former franchisees. The FDD always contains contact information for franchisees in the system. Contact several current and former franchisees to get their take on the pros and cons of the system. Is the franchisor’s estimate of the working capital requirements accurate? Does the franchisor provide adequate training? Is the operations manual helpful and easy to follow? Does the franchisor provide meaningful ongoing assistance? “Spending time on-site with a franchisee and seeing the good, the bad and the ugly was important in making my ultimate decision,” says Andrew Ingola, a local entrepreneur. He eventually decided to not move forward with purchasing a full-service painting franchise.
As with any business, there will be ups and downs. But with the right research, coupled with a proven business system, you have every chance to succeed. Good luck!
Donald R. Simon is president and CEO of Simon Business Consulting, Inc. Have a question for Don? [email protected]