To Franchise or Not to Franchise

If you don’t have a lot of solid business experience or don’t have experience in the particular field you are planning on entering, you should seriously consider buying a franchise rather than an existing business or starting a business from scratch. Although it is true that even a successful franchise typically nets smaller profit margins than other types of businesses due to franchising fees and expenses, the odds of surviving in business at all are much greater.

If you are entering a field with a very strong consumer name recognition factor, I would seriously urge you to consider doing so through a franchise. Whether you have experience in the field—fast food, automotive, or whatever—without the name recognition advantage, you are going to have to work extremely hard to offset the huge benefits of your franchised competitors.

Due Diligence

Perhaps even more so than with buying an existing business, you need to do a lot of homework before you purchase a franchise. You absolutely must have a lawyer review all documents and consider issues that may not be presented contractually. Find out whether the franchisor has a history of dissatisfaction among its franchisees. Have lawsuits been brought by franchisees against the franchisor? Why? Who won? Do exhaustive searches of the business and trade media for articles on the franchise(s).

Don’t take the word of a salesperson for the franchisor when looking for accurate information on the franchise. Get out and talk with as many current franchise managers and/or owners as possible.

Don’t Be “Sold” a Franchise-“Buy” a Franchise!

Many franchisors are out aggressively advertising and selling their franchises, while others don’t promote them at all! Don’t get pulled in by a franchisor that is aggressively promoting itself and trying to lure you into an agreement before you have weighed all the factors and comparison shopped alternatives. Once you have decided to seriously explore franchises, carefully assemble a list of prospective franchisees to evaluate in more detail. Come up with a list of core issues to compare. Then take your time getting and comparing vital information on each one. You do the shopping! Don’t let the franchisor do the selling! And then, when it’s time to make a final decision, go over each and every detail in the franchise agreement. You probably should have your lawyer read it, too.

Especially if you don’t have a lot of related business experience, you should generally go with the strongest and best franchise in the industry, even if it costs a little more.

Issues to Consider

There are many issues to consider before purchasing a franchise. These are just a few:

  • Exclusivity: Can another franchise be sold in your area? If so, what is the proximity regulation—two miles? One mile? Next door?
  • Hidden costs: Has every conceivable or possible cost been disclosed? Will the agreement between you and the franchisor protect you from hidden costs? How much will you have to contribute to local, regional, or national advertising budgets?
  • Cost calculators: Is the fee schedule subject to revision or escalation under any circumstances?
  • Revocation of franchise agreement: Under what conditions could the franchise be revoked? What processes are involved in a revocation? Are any investment costs that were paid by you reimbursable?
  • Cash flow: Carefully plan the cash flow of the business, especially prior to break-even. The franchisor may place restrictions on your business that may restrict your ability to cut costs if you get into a cash-flow bind.