You’ve decided to buy a franchise. Now comes the hard part: picking a winner. That can take some serious study. Many franchise disasters could have been avoided had franchisees spent more time learning what a franchise entailed before plunking down what may have been their life savings.
Start by asking at least two competing franchisers for their offering circulars. These documents, called Uniform Franchise Offering Circulars (UFOCs), sometimes run several hundred pages and are laden with legalese. But they include a lot of useful data, from annual revenues per location to what’s expected of franchisees. They also give names of former franchisees who no longer own a franchise.
Pay special attention to three-year percentage figures on franchise turnover. Anything double-digit could be reason for concern. Also read the section on litigation. Lots of lawsuits can signal a troubled system.
Next, compare prices. Besides the initial entry fee and royalties — the percentage of annual sales paid to the franchiser — check out what you’ll contribute to shared services, such as advertising. Look at the costs for software rental, equipment maintenance, audit, administrative and similar services. Some franchisers require you to pay for training at their headquarters. Also check what you’d need for initial inventory and store-construction expenses and how much of a cash reserve you’ll need to have in the bank.
All those costs should be considered when deciding whether a franchise is worth the money. While typical returns aren’t stated in circulars, they can be calculated from the revenue and expenses disclosed.
Pay attention also to the size of the franchise system. Systems with fewer than 50 units may not have all the bugs worked out of the business model. That could require more business and operational skill from franchisees than a larger system.
Study the territory and customer base being offered. Does the franchise offer area exclusivity? If not, how many other identical outlets are already there?
The offering circular also contains the company’s history and its management team, its financial statements, its processes for settling disputes and the risks associated with the franchise.
After narrowing the options, see the business in action by visiting several operating sites. Try to get a sense of what goes on, customer traffic, transaction size and other business operations. Talk to both current and former franchisees listed in circulars. Ask whether they would recommend their business, how many hours they put in, if it’s been worth it and whether they have renewed their licenses. For ex-franchisees, the key question, of course, is “Why did you leave?”
If you don’t totally understand what you’re getting into, hire an accountant or other professional to advise you.
If you’re working with a young franchise, you may have some bargaining power on your contract. You may be able to remove problematic conditions, such as gag rules that prevent disgruntled franchisees from complaining publicly; stipulations that the franchiser can change its policies unilaterally; and requirements that disputes be arbitrated in the home state of the franchiser.
While you’re in your strongest position before you sign, a large, established franchise system isn’t likely to make any changes to a contract.
Posted in: Franchising