Evaluating a Franchise
As a diligent potential franchisee, you will spend a great deal of time and effort preparing to meet the requirements of various franchises. You will groom yourself to match the capital investments, the time demands, the work demands, and the set of personal qualities sought after by the franchisor. Amidst all the preparation, it is easy to forget that the evaluation process is a two-way street. The franchisor must meet your standards as much as you must meet their’s. The interview goes both ways. So what aspects should you pay close attention to and what facets of franchising tend to be important time after time?
1. Know Thyself
Personality tests and evaluations can fail in the face of unrealistic goals and expectations. No matter how much you love food, would you be capable of working with and around it all day, every day? Just because you love to travel, does not mean you would make a good travel agent. There are a common set of skills involved in owning and operating a business that are sometimes contrary to the image of the business or to the expectations of the potential franchisee. Make sure to find out what your typical duties are likely to involve. Try to discover what working with a particular franchise entails. One great way to do this is to speak to other franchisees currently or formerly a part of the system. The UFOC will contain a list and contact information for all current franchisees. Another way to research your own ability is to get a job working at one of the franchise outlets prior to applying for your own.
2. Dollars and Cents
At some point, it comes down to those notes and coins that symbolize money in our society. Owning and operating a franchise is a lot of work. If after years of establishing and growing your business, you are not well-rewarded for your efforts, perhaps you will come to regret leaving that other job. You should not be afraid to ask your franchisor about how much money you can make. The answer will depend upon many factors, but a dialogue about your cash flow is important. The UFOC may contain earnings claims that are essential to your understanding of the franchise. Be cautious when evaluating earnings claims, however, as the answers may be misleading. In order to properly match a particular franchise’s earnings to your own potential, look for similar conditions in geography, customer base, customer demographics, time spent building the business, the personality of the owner, and the ability of the owner. The franchisor may suggest some franchisees to question; but be wary of these, as they have probably been selected because they will give a good impression—not necessarily a realistic impression. It may also be helpful to have an accountant look over the numbers and lend his or her expertise.
3. The Contract
Every franchise will differ slightly in terms of the contractual Franchise Agreement. The UFOC will also give some insight into a few important factors. You should make certain that the franchisor is doing his or her duty in providing for you and protecting you. Your protections should include a designated territory where you have exclusive rights to operate the franchise. Make sure that the territory is large enough such that you will not be at risk of having your profits squeezed by other franchises. The franchisor should also provide training and other services to help you start-up the business. Exactly what the franchisor will provide is outlined in the UFOC . If help is provided with financing, make sure to find out what that help includes. Do they have working relationships with lenders or will they merely aid you in filling out the loan application? Remember that the Franchise Agreement can be a fluid document. Particular clauses may be open for negotiation. Consult a franchise lawyer who will be able to tell how fair the contract is and which points should be disputed. Also make sure that the operating agreement between you and the franchisor is fair and that there are sufficient exit clauses and contingencies. It is useful to know what will happen to your interest in the franchise in the event of any dissolution of the agreement.
4. Ethical Alignment
When it comes to values, franchises come in many flavors. Some franchises adhere to Christian principles like Office Pride, and some are environmental activists like Ben and Jerry’s. Some franchises have no socially responsible role, and others you may consider to be completely unethical. If you are a vegetarian, would you work in a franchise restaurant that serves meat? If you observe the Sabbath, could you work on Friday nights and Saturdays? It is important to know your thoughts and feelings on matters like these, and whether or not you would be comfortable as a part of the franchise family.
Not to be confused with ethics, each franchise will have a different set of needs from their franchisees. Some franchises, like tax service centers, are mostly seasonal. Others will require year-round work. Different sets of daily hours and days during the week will be required. Can you handle a flexible, variable schedule, or do you need a fixed set of hours? Will you mind working on weekends? Do you want time for a part-time job? Would you prefer a seasonal business or would the potential idleness throughout the rest of the year drive you to distraction? All of these are questions you must ask yourself when considering any franchise.
6. The Future
It’s not just an abstract concept. You should treat your involvement in any franchise as an investment in your future. Therefore, you are also investing in the future of the franchise. As a general rule, franchises that are below 25 units in size are still young and vulnerable. You should evaluate the long-term potential of any franchises in which you are interested. What is the value offered by the product or service? Is it a product or service whose usefulness is likely to decline with time or fall prey to the technological age? What sorts of customers patronize the franchise? Do these customers represent declining or growing demographics? Answering these questions requires vision and research, but you may be well rewarded for your work.
The above 6 categories are by no means a comprehensive list of evaluative concerns, but they are an excellent start. When in doubt, consult with your lawyer or CPA. The most important part of making sure a franchise meets your standards is by talking to past and present franchisees of the system in which you are interested. Don’t be afraid to ask them what they like and dislike about the franchise, what works for them and what doesn’t, and whether or not they would do it again if given the chance. If you are diligent in your research, you will greatly increase the chances that you will find happiness and contentment with your investment. Good luck!