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HOW TO BUY A FRANCHISE If used, the UFOC can help potential franchisees avoid dishonest franchisors. The best defenses a prospective entrepreneur thoroughly nonexistent has against unscrupulous franchisors in a franchise, right are preparation, common sense, and patience. By investigating before investing Asking potential and franchisees eliminate the risk of being hoodwinked into a business. the questions resisting the urge to rush into an investment decision helps a potential franchisee avoid unscrupulous franchisors. The president of a franchise consulting firm estimates that 5 to 10 percent of franchisors are dishonest – “the rogue elephants of franchising”. Potential franchisees must beware. Franchise fraud has become a major growth market in the United States in recent years. Because dishonest franchisors tend to follow certain patterns, well-prepared franchisees can avoid getting burned. The following clues should arouse the suspicion of an entrepreneur about to invest in a franchise. Claims that the franchise contract is a standard one and that “you don’t need to read it”.
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 1 of 15 1/8/2009
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A franchisor who fails to give you a copy of the required disclosure document at your first face-to-face meeting. A marginally successful prototype manual outlining the franchise system or no manual (or system) at all. Oral promises of future earnings without written documentation. A high franchisee turnover rate or a high termination rate. An unusual amount of litigation brought against the franchisor. Attempts to discourage you from allowing an attorney to evaluate the franchise contract before you sign it. No written documentation to support claims and promises. A high-pressure sale – sign the contract now or lose the opportunity. Claiming to be exempt from deferral laws requiring complete disclosure of franchise details. “Get-rich-quick schemes,” promises of huge profits with only minimum effort. Reluctance to provide a list of present franchisees for you to interview.
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 2 of 15 1/8/2009
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Evasive, vague answers to your questions about the franchise and its operation. Not every franchise “horror story” is the result of dishonest franchisors. More often than not, the problems that arise in franchising have more to do with franchisees who buy legitimate franchises without proper research and analysis. They end up in businesses they don’t enjoy and that they are not well suited to operate. The following steps will help any franchisee make the right choice. Evaluate Yourself. Henry David Thoreau’s advice to “know thyself” is excellent advice prospective franchisees. Before looking at any franchise, entrepreneurs should study their own personalities, experiences, likes, dislikes, goals and expectations. Will you be comfortable working in a structured environment? What kinds of franchises fit your desired lifestyle? Do you want to sell a product or a service? Do you want to work with the public? Do you enjoy selling? What hours do you expect to work? Do you mind getting dirty? Do you want to work with people or do you prefer to work alone? Which franchise concepts mesh best with your past work experience? What activities and hobbies do you
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 3 of 15 1/8/2009
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enjoy? What income do you expect a franchise to generate? How much can afford to invest in a franchise? Will you be happy with the daily routine of operating the franchise? Most franchise contracts run for 10 years or more, making it imperative that prospective franchisees conduct a complete inventory of their interests, likes, dislikes, and abilities before buying a franchise. Research the Market. Before shopping for a franchise, entrepreneurs should research the market in the areas they plan to serve. How fast is the overall area growing? In which areas is that growth occurring fastest? Is the market for the franchise’s product or service growing or declining? Investing some time in the library or on the World Wide Web developing a profile of the customers in the target area is essential; otherwise, the potential franchisee is flying blindly. Who are your potential customers? What are their characteristics? What are their income and education levels? What kinds of products and services do they buy? What gaps exist in the market? These gaps represent potential franchise opportunities for you. Solid market research should tell a prospective franchisee whether or not a particular franchise is merely a passing fad.
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 4 of 15 1/8/2009
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Steering clear of fads and into long-term trends is a key to sustained success in franchising. The secret to distinguishing between a fad that will soon fizzle and a meaningful trend that offers genuine opportunity is finding products or services that are consistent with fundamental demographic and lifestyle patterns of the population. That requires sound market research that focuses not only on local market opportunities but also on the “big picture.” For instance, the prevalence of dual-career couples, available disposable income, and hectic schedules is creating a booming business for maid service and home improvement and repair franchises. Consider Your Franchise Options. Tracking down
information on prospective franchise systems is easier now than ever before. The International Franchise Association publishes the Franchise Opportunities Guide, which lists its members and some basic information about them. Many cities host franchise trade shows throughout the year, where hundreds of franchisors gather to sell their franchises. Many business magazines, such as Entrepreneur, Inc., Fortune Small Business, and others, devote at least one issue to franchising, in which they often list hundreds of franchises.
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 5 of 15 1/8/2009
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Plus, most franchisors now publish information about their systems on the World Wide Web. These listings can help potential franchisees find a suitable franchise within their price ranges. Get a Copy of the Franchisor’s UFOC and Study It. Once you narrow down your franchise choices, you should contact each franchise and get a copy of its UFOC. Then read it! This document is an important tool in your search for the right franchise, and you should make the most of it. When evaluating a franchise opportunity, what should a potential franchisee look for? Although there’s never a guarantee of success, the following characteristics make a franchise stand out: A unique concept or marketing approach. “Me-too” franchises are no more successful has achieved the an impressive of its than “me-too” rate by while independent businesses. Pizza franchisor Papa John’s growth emphasizing quality ingredients,
Domino’s is known for its fast delivery. Profitability. A franchisor should have a track record of profitability and so should its franchisees. If a franchisor is not profitable, its franchisees are not likely
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 6 of 15 1/8/2009
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to be either. Franchisees who follow the business format should expect to earn a reasonable rate of return. A registered trademark. Name recognition is difficult to achieve without a well-known and protected trademark. A business system that works. A franchisor should have in place a system that is efficient and is well documented in its manuals. A solid training program. One of the most valuable components of a franchise system is the training it offers franchisees. The system should be relatively easy to teach. Affordability. A franchisee should not have to take on an excessive amount of debt to purchase a franchise. Being forced to borrow too much money to open a franchise outlet can doom a business from the outset. Respectable franchisors verify prospective franchisees’ financial qualifications as part of the screening process. A positive relationship with franchisees. The most successful franchises are those that see their franchises as partners – and treat them accordingly.
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 7 of 15 1/8/2009
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The UFOC covers the 23 items discusses in the previous section and includes a copy of the company’s franchise agreement and any contracts accompanying it. Although the law requires a UFOC to be written in plain English rather than ”legalese”, it is best to have an attorney experienced in franchising review the UFOC and discuss its provisions with you. The franchise contract summarizes the details that will govern the franchisor-franchisee relationship over its life. It outlines exactly the rights and the obligations of each party and sets the guidelines that govern the franchise relationship. Franchise contracts typically are long term; 50 percent run for 15 years or more, so it is extremely important for prospective franchisees to understand their terms before they sign them. Particular items in the UFOC that entrepreneurs should focus on include the franchisor’s experience (item 1 and 2), the current and past litigation against the franchisor 9item 3), the fees and total investment 9item 5, 6, and 7), and the franchisee turnover rate for the past three years (item 20). The franchisee turnover rate, the rate at which franchisees leave the system, is one of the most revealing items in the UFOC. If the turnover rate is less than 5
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 8 of 15 1/8/2009
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percent, the franchise is probably sound. However, a rate approaching 20 percent is a sign of serious, underlying problems in a franchise. Although virtually every franchisor has been involved in lawsuits, an excessive amount of litigation against a franchisor should also alert a prospective franchisee to potential problems down the road. Determining what the cases were about and whether or not they have been resolved is important. Talk to Existing Franchisees. Although the UFOC contains much valuable information, it is only the starting point for researching a franchise opportunity thoroughly. Perhaps the best way to evaluate the reputation of franchisor is to interview 9in person) several franchise owners who have been in business at least one year about the positive and the negative features of the agreement and whether the franchisor delivered what it promised. Knowing what they know now, would they buy the franchise again? After investment banker Todd Recknagel narrowed the field of franchises he was considering, he spent time interviewing several franchises about their experiences with the franchisors. Based on his findings, Recknagel decided to purchase a Blimpie Subs and Salads franchise. Recknagel’s
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 9 of 15 1/8/2009
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research paid off; in less than six years, he has built eight outlets and was named Franchisee of the Year both by Blimpie and the International Franchise Association. Item 20 of the UFOC lists all of company’s franchisees and their addresses by state, making it easy for potential franchisees to contact them. It is also wise to interview past franchisees to get their perspectives on the franchisor-franchisee relationship. (UFOC item 20 also lists those franchisees who have left the system within the past fiscal year.) Why did they leave? Franchises of some companies have formed associations, which might provide prospective franchisees with valuable information. Other American American franchise sources of of information and the include the Association Franchisees and Dealers, the International
Association,
Franchise Association. Table 4.2 offers some important questions to ask existing franchisees. Ask the Franchisor Some Tough Questions. Take the time to visit the franchisor’s headquarters and ask plenty of questions about the company and its relationship with its franchisees. You will be in this relationship a long time, and you need to know as much about it as you possibly can
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 10 of 15 1/8/2009
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beforehand. What is its philosophy concerning the relationship? What is the company culture like? How much input do franchisees have into the system? What are the franchisor’s future expansion plans? How will they affect your franchise? What kind of profits can you expect? (If the franchisor made no earnings claims in item 19 of the UFOC, why not?) Does the franchisor have a well-formulated strategic plan? Make Your Choice. The first lesson in franchising is “Do your homework before you get out your checkbook.” Once you have done your research, you can make an informed choice about which franchise is right for you. Then it is time to put together a solid business plan that will serve as your road map to success in the franchise you have selected. The plan is also a valuable tool to use as you arrange the financing for your franchise. We will discuss the components of a business plan in Chapter 9.
Questions to Ask Existing Franchisees. A key ingredient in any prospective franchisee’s evaluation of a franchise opportunity is to visit existing franchisees and
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 11 of 15 1/8/2009
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ask them questions about their relationship with the franchisor. The following questions will reveal how well the franchisor supports its franchisees and the nature of the franchisor-franchisee relationship. How much did it cost to start your franchise? How much training did you receive at the outset? How helpful was it? Did it prepare you to run your franchise? Does the franchisor provide you with adequate ongoing support? How much? Are you pleased with the level of support you receive? What is the nature of this support? Is the company available to answer your questions? How often do you contact the company? What is the typical response? How much marketing assistance does the franchisor provide? Is it effective? How can you tell? Do franchisees have input into the development of new products or services? Which of your expectations has the franchisor met? Failed to meet? How often does someone from the franchise check on your operation? What is the purpose of those visits?
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 12 of 15 1/8/2009
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What is a “typical day” like for you? How do you spend most of your time? Which day-to-day tasks do you enjoy performing most? Least? How much did your franchise gross last year? How much do you expect to gross this year? What has been the pattern of your outlet’s sales since you started? Is your franchise making a profit? If so, how much? What is your net profit margin? How long did you operate before your outlet began to earn a profit? Is your outlet consistently profitable? What is your franchise’s break-even point? Has your franchise met your expectations for return on investment (ROI)? Is this business seasonal? If so, how do you get through the off season? Is there a franchisee association? Do you belong to it? What is its primary function? Does the franchisor sponsor system-wide meetings? Do you attend? Why? Does the franchisor listen to franchisees? What changes would you recommend the franchisor make in its business system?
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 13 of 15 1/8/2009
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Where do you purchase supplies, equipment, and products for your franchise? How much freedom do you have to run your business? Does the franchisor encourage franchisees to apply their creativity to running their businesses, or does it frown on innovation in the system? Has the franchisor given you the tools you need to compete effectively? How much are your royalty payments and franchise fees? What do you get in exchange for your royalty payments? Do you consider it to be a good value? Are you planning to purchase additional territories or franchises? Why? Has the franchisor lived up to its promises? Looking back, what portions of the franchise contract would you change? What are communications with the franchisor like? How would you describe franchisees’ relationship with the franchiser? How would you describe your relationship with the franchisor? Are most franchises happy with the franchise system? With the franchisor?
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 14 of 15 1/8/2009
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What advice would you give to someone considering purchasing a franchise from this franchisor? Knowing what you know now, would you buy this franchise again?
e8aaed94-4905-45ba-8734-80c6f6078a24.doc.doc Source: Adapted from Andrew A. Caffey, “Analyze This”, Entrepreneur, January 2000, pp. 163167; Roger brown, “Ask More Questions of more People Before Deciding, Then Plan to Work Very hard, “Small Business Forum, Winter 1996/1997, pp 91-93; Roberta Maynard, “Choosing a Franchise,” nation’s Business, October 1996, pp 56-63; Andrew A. Caffey, “The Buying Game,” Entrepreneur, January 1997, pp 174-177; Julie Bawden Davis, “A Perfect Match,” business StartUps, July 1997, pp 44-49 Tarek Kettaneh Page 15 of 15 1/8/2009