First Step: Identify Your Interests
Think about a product or service that connects with an area of special interest and ability for you. As with any enterprise, financial success is much more likely if you truly identify with the value you bring to your customers. The connection may not be as obvious as "I've always loved cars, so I opened a Jiffy Lube" (although that's not a bad example). It could be that you've been a stamp collector and decide to open a travel agency because you've learned so much about the world through stamps. Follow your bliss, even if you're also keeping an eye out for high profit potential.
At the same time, it's usually a good idea not to stray too far from your current career. For example, refugees from managerial jobs are likely to have the best luck on familiar turf, such as in business services, says Mary Tomzack, author of Tips and Traps When Buying a Franchise (New York: McGraw Hill, 1994). "The typical corporate person who gets into fast food franchising doesn't know what he's getting into," she says.
First Step, Part Two: Figure Out How Much Money You Have to Invest
This is a perfectly straightforward process. And while you're going through it, look for signals about your level of commitment to the idea and how it plays into your overall outlook on investing and borrowing (and meeting obligations they create).
Second Step: Research
Look for specific franchises that meet your interest and financial criteria. Information abounds on what's available, and there are several organizations that perform a "watchdog" or recommending role, including the Federal Trade Commission in Washington, the American Franchisee Association in Chicago, and the American Association of Franchisees and Dealers in San Diego.
In addition to your interests and financing outlook, begin considering the relative risks and rewards for well established franchises vs. ground floor opportunities with great idea based appeal.
Third Step: Give Them the Once Over
Once you've cut the pack to a select few, evaluate the qualification process. For the one or two companies that really seem to meet your dreams, visit company headquarters and see what's in the Uniform Franchise Offering Circular (UFOC) a disclosure form required of all franchisers by the Federal Trade Commission. It gives you 10 working days to study the agreement carefully without contact by the (sales motivated) franchiser. Have your lawyer and accountant check it out, too.
Fourth Step: Give Them the Twice Over
Investigate the franchise company, and develop a business plan for your first three years. Get advice from fellow franchisers named in the UFOC about whether your projections are on target. Then ask them how much fun they're having and whether they're making any money. Verify all information in the UFOC, and make sure you understand how to get out of the deal if things don't go as planned.
What Makes a Good Franchise?
In its annual report on "The Nation's Best Franchise Buys," the National Business Employment Weekly cites a handful of qualities to look for in a franchise you seek to buy. Here are six consistently cited basics:
- Name recognition. This can be one of the chief values of franchise ownership. A good reputation is even better.
- Exceptional product/service quality. Naturally, you'll be looking for products and services that delight customers. Anything less should be a red flag.
- Proven profitability or outstanding potential. If the franchise is well developed, you'll be looking for a solid track record of profits among franchisees. If it's a young operation, you'll have to look more carefully at whether the company has truly succeeded in matching a great idea with a real market in a unique way.
- Superior franchisee relationships. It's difficult to imagine success in this field without solid communication. Though some franchisees are remarkably independent, most thrive on a healthy give and take of information, advice and requests.
- Attentiveness to trends. This is a happy by product of good communication, combined with other corporate activities, that keeps the organization alert to changes in the market and new opportunities for success.
- Willingness to change. Even the best concepts both in the marketplace and in managing the company are continually fine tuned and updated. That's how companies remain market leaders. Being attentive to trends isn't enough. The company must address the trends quickly and effectively. Ask for examples of grassroots driven change in every franchise you evaluate.
What's the likelihood of running across an organization with all of these qualities. They're out there but, like many of life's attractions, franchising may not be as smooth as it seems on the surface.
"Theoretically, there's a symbiotic relationship between the franchise company and the franchise operator. But in reality, they're often at each other's throats," warns New York
Times business writer Earl C. Gottschalk, Jr. "The franchise company wants royalties, and the franchise operator hates paying them. The franchise company wants as many outlets as possible, but the franchise operator doesn't want new competition." More often than the franchise industry is willing to admit, things don't work out, says Gottschalk. While the industry claims franchises have a 95 percent success rate, he cites a study by Wayne State University economics professor Tim Bates that draws a much different conclusion. Bates looked at 7300 small businesses started during the 1980s, including 400 franchises, and found that 35 percent of the franchises had gone out of business by late 1991, vs. 28 percent of the other small businesses surveyed.
Danger Zones
If you've made it this far and feel confident that you've identified a franchise that has a strong likelihood of success, run it past this final group of danger zone questions to make sure you're not missing something that would cause you to think twice. Several of these are noted by Meg Whittemore, Andrew Sherman and Ripley Hotch in their book, Financing Your Franchise (New York: McGraw Hill, 1993):
- Does the franchise have a high "churning" rate? Churning is the buying out of less than successful franchises by the franchiser, who then resells the franchise in order to collect a new franchise fee.
- Is the franchiser telling you it isn't necessary to read all the fine print in the disclosure document? Amazingly, the Federal Trade Commission finds 40 percent of new franchisees sign on without reading it.
- Is the franchiser making projections about what your earnings will be, but refusing to put the claims in writing? This is actually a violation of federal law. Projections based on what franchisees have earned must be conveyed to you in writing.
- Is the franchiser really interested in you? Good franchisers don't want unqualified people to buy their franchises. The more selective they are in approving you as a buyer, the better.
- Is the training program unusually long or short? If too long, the program may be too difficult teach effectively. If too short, the program may indicate a shallow operation.
- Must you buy supplies from the parent company? If so, watch out. This may be another profit center for the franchiser rather than a service to franchisees.
- Can you get out easily? Make sure there are no rules preventing your exit should things fail to work out.
There are many lists that rank franchises by category, sales, locations or other variables. Yet all should be viewed with a grain of salt, since there really isn't any completely objective way to measure which franchisers best serve the interests of their franchisees.
In an attempt to offer some sort of an objective round up of franchises to consider, the National Business Employment Weekly asks a panel of distinguished franchising specialists each year to select their choices of best franchises. Their picks are separated into two categories: franchises costing less than $100,000 each, and those costing more.
The panelists represent a wide range of backgrounds and interests. For the list of best franchises that follows, the panel was composed of: Ann Dugan, director of the Small Business Development Center at the University of Pittsburgh; Kathryn Taylor, a franchising attorney with Crowe & Dunlevey in Tulsa, OK; Dr. Gary Benson, a professor in the college of business and economics at the University of Wisconsin Whitewater; Robert Purvin, Jr., chairman of the American Association of Franchisees & Dealers in San Diego, and author of The Franchise Fraud (New York: John Wiley & Sons, 1994); Michael Seid, a franchising consultant and managing director of the Strategic Advisory Group Inc. in West Hartford, CN, Susan Kezios, president of Women in Franchising, and the American Franchisee Association, both in Chicago; Lois Marshall, a franchise industry recruiter and president of The Marshall Group in Salinas, CA; and William Slater Vincent, an assistant professor in the department of management and entrepreneurship at Kennesaw State College in Kennesaw, GA.
