If you’re thinking about starting your own business, you may have a few stars in your eyes — think Steve Jobs in a garage or Ray Kroc planning an unheard of chain of hamburger joints, but Apple and McDonald’s are more the exception than the rule.
Blink away the stars and get down to work. There is a great deal you can do to improve your odds of success. At the top of that list is research. Know as much as you can before you sign any contracts or put any money on the line.
An advantage of a franchise is you get access to a wealth of information, including training and ongoing support, to help you decide whether you can succeed with a particular business.
The franchisor’s system, however, can be a double-edged sword. On the one hand, it shows you all you need to do to achieve profitability, but if you’re not willing to follow the franchisor’s system and you would prefer to do tweak things because “you know better,” a franchise is probably not for you.
We like the franchise model because it allows you to minimize your risk while still reaping many of the rewards of owning your own business: you can take control of your career and increase your income. But not all franchises are worth your investment. The trick is to figure out which ones are.
The good news is the Federal Trade Commission requires franchisors to disclose a great deal of helpful information in a franchise disclosure document (FDD). A good franchise coach can help you peruse this document, but the FTC requires it be written in standard English — no legalese — so you certainly can begin the process yourself.
8 Ways To Vet A Franchise
1. Check out the franchisor’s background.
How long has the franchisor been in business? What is the background of the company executives? How long have they been with the company? Answers can be found in Items 1 and 2 of the FDD.
2. Learn if the franchisor has a history of litigation.
If the franchise has faced a history of lawsuits with its franchisees, you need to read no further. Ideally, a franchisor should work with the potential franchisees well ahead of time, so both parties know what will be necessary to hold up their sides of the contract. Item 3 in the FDD.
3. Know your costs.
You will find the initial franchise fee, which typically ranges from $35,000 to $50,000. You will also find all of the costs to set up the business, from the lease, to outfitting a store, initial inventory, as well as marketing and advertising. You will also find royalty fees, usually a percentage of sales. Most of the franchises we work with have a total investment ranging from $50,000 to $150,000. FDD items 5-7.
4. Can you live with the franchisor’s system?
If you buy a franchise it will be because you have learned that their franchisees are successful. You will know that their method of doing things works. If you join the company you will want to implement the system the franchisor has already proven. Will you be able to follow their system? Do not invest in the franchise if you won’t.. Items 2 and 8 in the FDD.
5. Rate their training.
Item 11 of the FDD will describe the franchisor’s training program, from the topics covered during the training, how many hours it requires, the cost and who is covered by the training. You can find out a lot more about the training program by interviewing franchisees.
6. Know the costs and expertise of their advertising and marketing support.
Every new business requires a marketing program. Make sure you know what the franchisor will provide and what it will cost you. FDD items 6 and 11.
7. Interview current and former franchisees.
Probably your most important step in the process is reading through FDD item 20 to see the list of franchisees, which includes former franchisees, and their contact information. Plan to interview as many as possible to check into the franchise. Hear the unvarnished details from those who came before you. The most important question is whether the franchisee would make the purchase again knowing what they know now. Why or why not?
8. Assess the franchisor’s financial history.
You will find the franchisor’s financial statements in tem 21 of the FDD. You don’t want to invest in a franchise that is tottering on the edge of financial viability.
For more information, check out the FTC’s website, which has published a consumer guide to buying a franchise.
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About the author
Ready to make your dream of becoming an entrepreneur come true? Get your free evaluation today! Contact Dan Citrenbaum to help you create the career you’ve always wanted. As a business coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at [email protected] or at (484) 278-5489.
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