Should You Buy a Franchise?
Everyone has the aspiring dream to one day own their own glamorous business or perhaps a franchise business that will rake a lucrative living. If you own your own business it can help you afford that nice condo downtown in the heart of the city. It will also buy you a second home on the beach in some exotic location. Listen. If this is you then you need to seriously reconsider if going into business is for you. Going into business even with a franchise proven model has its fair share of success stories and failures. From my personal experience owning and operating a franchise service repair company, I want to share with you some pros and cons before making that final franchise buying decision.
Is Buying a Franchise Risky?
There are some out there that think buying a franchise will somehow lower their risk and to some sense this is true. I believe that it all boils down to the individual and how disciplined they are in life and with making a franchise work. If you go into a franchise half-heartedly then you will only get half-hearted results. You are the person that makes the franchise work and operate daily. Not your corporate franchise headquarters sitting in a skyscraper in New York.
Your franchisor needs you to be successful, otherwise, they would have just hired to have people run their franchise locations. So why don't they? Well, the secret is that they make more with owner-operators running a franchise because the franchise's out there are extremely difficult to run and still have a decent failure rate. You can ask your potential franchisor for their list of failure rates. It should be in the franchise disclosure document which you should hire an attorney to look at.
Buying a franchise can be just as risky as starting your own business model if you already know how to market and run a business. Notice that I say "Can Be." As with anything, there is a risk. I just don't want you to think that you are somehow immune to risk because you bought a name brand franchise.
Are You Buying a Job?
When buying a franchise you should ask yourself if the franchise you are looking at is going to be a job for the term of the contract or if it has the possibility to scale so that you can manage the business and grow it? Most franchises are meant to have the owner heavily involved because that is what will make them successful. If the franchisor says it is ok to have a non-owner operated business model then that means they may have other owners that are not involved in the day to day operations.
The best way to find out if your franchisor model is going to be the right fit is to call other franchise owners. Ask the franchise owners if this has just been a 60-80 hour per week job for them or if they have grown past that and scaled the business model? Ask the franchisor for a list of the top 20 franchises that will be comparable to the market size you are buying. You will also want to ask for the "average" or "below average" performing franchises comparable to the market size you are buying.
Make sure that you have a well-crafted interview that does not exceed 10 minutes that you will spend with each franchise owner over the phone. You can literally ask any questions you want. This has saved me in the past from buying some awful franchise models that looked really good until I started interviewing different owners. One of my favorite questions is "Would you buy this franchise again?" If they answer no you should really dig deeper with them to find out why. If you would like to see my interview questions please send me an email so I can forward them to you. I would be happy to do so.
Franchise Fees
On top of all the benefits of a franchise, your new business comes equipped with just about every fee imaginable...and don't forget to double-check! If there is one thing I hate the most in the franchise world it is all the fees that come with them! Of course, they do because the Franchise model is not about the owner, it is about the Franchisor! That is one important thing to remember when looking at a franchise.
Most franchises have royalties, tech support fees, admin fees, software fees, and anything else they might want to add. Just make sure to see a list of all the fees that apply to the franchise. You will also want to know how long the franchise contract is and if there are "Fees" associated with renewal. With my franchise, it was a 10-year contract and it was renewable with a $7500.00 renewal fee per territory location and I currently own 3 locations. That is a heavy hit for any business owner that may not be expecting that, especially after how well they have grown the business for the Franchisor.
Do you Have Exclusivity?
Some franchisors sell franchise's with exclusivity so that no one else can come into your area and buy the same franchise model. This is either defined by purchasing rights through zip codes or purchasing whole cities and/or states. There are also some franchisors that will put a clause in there that they or one of there "subsidiaries" have the option to come in and open a location.
This is a death clause in my opinion and you should not consider a franchise that has this in their contract, it is better to walk away from them and consider a friendly franchise. First, this causes distrust in the franchisee's mind knowing that at any time the corporate office can come into their area and open a location, even though the odds might be low. Secondly, the franchisors that have this is their agreements, in my opinion, are just flat out not franchisee friendly. They are looking at new owners' locations in an attempt to monopolize their area of opportunity exists.
One of the things that I highly recommend to someone purchasing a new franchise is to find areas and territories that they may want to expand into down the road. If you have these areas picked out you can make an arrangement with the franchisor to have exclusive "First Right of Refusal." What this does is give you the opportunity to buy the franchise within a certain allotted time frame if someone becomes interested in your area of interest. The franchisor will not sell the areas that you are interested in before coming to you first and seeing if you want to buy those areas.
Your best option is to find a franchise that will allow exclusivity to your area that you want to purchase, including exclusivity from the franchisor coming in and opening a location. If you buy a franchise like this you will be much happier knowing that someone cannot come in overnight and open a location right next to you.
Whose Business Are You Really Growing?
Franchise models are great and they can work really well because you have a name brand backing you. This will work in your favor, especially with bigger name brands out there that have been around for a very long time. The part that bothers me personally about a franchise is that I'm working on growing someone else's business name at the end of the day.
Growing a business is a lot of hard work and even though you may have a good name through your franchise model you are still at risk and will still have some hard times. The question I would challenge you on is this. If you are investing tens of thousands of dollars buying a franchise and hard sweat equity then why not start your own brand? I was faced with this 2 years ago when I looked at possibly buying another franchise model.
I was looking for more opportunities and growth. The thought of buying another franchise appealed to me and also it left a slightly bitter taste in the back of my mouth because of the franchise that I was currently involved in. In most sense's I was a business owner but then I was also still accountable to the "Corporate" office as they called themselves.
So what are franchisees exactly? They are basically subcontractors/employees building a "Corporate" brand identity in an unknown market in my opinion. They are not a true business owner that has full control. A true business owner has 100% full control and rules over his business. If he wants to leave for 2 weeks on vacation and close the doors while he is gone, he can do that. I place that as an example because some franchises do not allow you to close your business operations for more than 7 days.
At the end of the day, I decided that I was not going to take $75,000 and buy a new franchise. I was going to build my own set of brand identities in the vast digital world. This is not a discouragement to buying a franchise, but rather a cautionary article on what you should look for in a franchise. Don't just buy a franchise and trust the franchisor without doing your diligence.
Systems
Every business operates on the fundamentals of systems and organizational structure. Great systems allow you to scale without having to change your systems and software. When looking at buying a franchise I recommend doing an in-depth look at their operating systems. Let's take a look at the most important ones.
Scheduling/Dispatch
If you are running a service industry business what does the scheduling and dispatch software look like? Is there a support team behind the software and is it continually being improved and updated? How easy is the software to use?
Inventory Software
Depending on your inventory this is a must-have for franchises. This software should also integrate with your Point of Sale system and Scheduling Software so that you do not have to manually keep track of your employees inventory.
POS
You will want to have a Point of Sale system that integrates with everything and has low transaction fees. Often times your franchisor has negotiated rates that are lower than the industry standards.
Invoicing
All I can say is Ipad invoicing rocks! If the franchise is still operating on carbon copy paper invoices it may not necessarily mean that it is an outdated franchise. If this is the case you will want to find out what improvements they have down the road for ipad invoicing. You will want this to obviously sync with everything in your books, inventory and scheduling software
Accounting
Most franchisors do not have accounting software that will sync to your Point of Sale and then sync to QuickBooks or your preferred accounting software. If you find one that does this will be an added bonus for sure. I use Online QuickBooks for my accounting and we do have to manually reconcile our Point of Sale system with our Scheduling/CRM software and bank account to make sure everything balances.
Technology
When reviewing the franchisor systems you should stand back and take a look at their advancement with technology. Are they a company that is still in the stone ages? Do they embrace technology or do they fight it until they absolutely need it? Some of these answers may be hard to find but trust me it will be worth it. You want to be part of a franchise that embraces technology and is continually evolving in this realm so as to serve its franchisees and their customer base. A company that embraces and grows with technology is a company that will help you to stay ahead of the competition.
Marketing
Obviously marketing is one of the driving forces behind a franchise and a franchise that sucks at marketing is going to have less performance than a franchise that is on top of their marketing. A lot of franchise will tell you that you are paying towards their "National Campaigns" for radio, TV slots, and other forms of national brand recognition. If they start down this line I challenge you to simply ask them to show you what they have done in the past and what dates are they planning to do this in the future? I have found that national advertising is a joke with franchisors and most do not spend it on what they claim. If you can opt-out of this expense I would recommend doing that if the franchisor will let you. You will also have more negotiating power while you are looking at franchises to buy rather than having already signed the paperwork.
Dive deeply into the marketing channels and the material that the franchisor utilizes. Do they print their own marketing materials? Do they outsource their marketing materials to another 3rd party and then upcharge their franchisees? Is the franchisee solely responsible for printed marketing materials? This is not necessarily a bad thing and in fact, you may even save money utilizing your own provider since most franchisors will upcharge you on everything they resell to you.
Will This Franchise Be Profitable?
One of the hardest things to find out is if your franchise could be profitable in your area. It is illegal for franchisors to make claims about what you can make per year and how well you will do. What they can do is provide some statistical averages in their disclosures. These are obviously averages and the heavy hitters bring up those numbers. You might have a franchise owner that has owned New York City for the past 10 years and is the number one franchise in the United States. Obviously this will skew the numbers to look better for the guy that wants to buy a location in North Idaho somewhere.
I have found the best way to determine how well a franchise can do by simply cold calling the list of owners the franchisor will provide. You will first want to determine your market size per population and then compare this to current owners running a franchise. Here is a general list of questions to get you started. Feel free to use them and add or subtract from them. If you are a current franchisee or actively looking for one and have some great questions to add please feel free in the comments section of this post.
-What market size is your franchise?
-How many locations do you own?
-What is your best performing location and why?
-What is your annual gross revenue?
-What is your net profit?
-How much do you spend on marketing?
-What is your best marketing effort?
-What do you think has contributed to your franchise results?
-What is your favorite part of running this franchise?
-What is your least favorite part of running this franchise?
-Do you enjoy working with the franchisor team?
-If you had to do this over again would you still buy this franchise? Why or why not?
This is just a shortlist to get you going. In the past I had a 30-minute interview with pages of questions I would ask franchisees. I will be happy to share this and more in a future post.
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