October 27, 2016 at 5:58 pm #58233
A reader recently posed a great question: What kinds of things do I need ask and bee on the look out for if I am considering opening the first franchised location of a small business?
Our article on 7 steps to starting a franchise has a lot of good info that would be applicable.
Has anyone else been through this? Considered opening the first franchise location of what was formerly a small business?January 6, 2017 at 3:01 pm #65086
When evaluating a franchise investment, you want to look at the track record and success rates of current franchisees, but that’s not possible if you might be the very first franchisee. Some things I would look for are below.
1. Has the franchisor made the necessary investments in their own infrastructure to support a franchisee. The franchise fees and royalties pay for your training and support, and it’s key that the support infrastructure is there for you. I would encourage you to pepper in questions like: When I am a franchisee, who will I talk to when I need operational support? Marketing support? Sales support? When I encounter HR issues? I would spread these questions around in a larger conversation. Ideally, the answers are all separate people with different skills. If it’s the same guy each time, that’s a red flag. This franchisor may not yet have the infrastructure to properly support its franchisees.
2. Transitioning from a small business to a franchise is challenging, and some new franchisors may not appreciate that the franchise business is separate from the small business they used to operate. The small business might be a restaurant, but the franchisor is a training and development company in the business of teaching others how to operate a certain type of restaurant. Have they really developed the systems, procedures, operating manuals, etc. that will allow them to successfully train you? Make sure you get a chance to take a look at some of these training materials before you sign on the dotted line.
3. What was the franchise recruitment process like? A good process should be well-structured with clear steps along the way that include a series of webinars/meetings that allow you to understand the business model, meetings with key leaders, disclosure of the FDD, etc. If the recruitment process is more haphazard, there is reason to be concerned. If they have not invested the necessary resources in developing a clear system for franchisee recruitment, they may not have devoted the resources needed to develop all of the other systems you will need to run your business successfully. Also—and this is gut check as much as anything—how did the recruitment process feel to you? Did it feel like you were “being sold” a franchise or did it feel like the franchisor was recruiting you as a genuinely strong addition to their concept? After they have had a chance to get to know you a bit, ask them: Why do you think I will be a good fit for this business?
4. When you get the FDD, take some extra time and involve an accountant in your review of the FDD’s Item 21. This is where the franchisor needs to provide three years of audited financial statements. Usually, they will be appended as an Exhibit towards the end of the FDD. Assess the financial strength of the franchisor. Everyone likes to run as lean as possible, and that’s great. Still, the franchisor must have the necessary financial resources to support you in your endeavors. How strong is their income statement and balance sheet? Again, involve an accountant if you are not familiar with reading financial statements.
5. Finally, a positive twist with a new franchisor is that they be more willing to negotiate terms of the franchise agreement. These contracts are largely non-negotiable, especially with established brands. They are all the same to help ensure brand consistency. But, a new franchisor might be willing to make accommodations, especially if they see you as a great first franchisee. A franchise attorney can help you negotiate select terms of the agreement.
Good luck!January 7, 2017 at 3:35 am #65218
When considering any business or Franchise, Unless the Franchise is Proven (75% of Franchisors are successful), consider the following:
You will likely fail, and lose a lot of money (your franchise development fee, your sunk costs, and finally, your landlord will make you pay the rent for the Entire Lease term !!!)
Best advice: Buy a business or Franchise ONLY if you have some key Unfair Advantage that can make you resiliant even if adverse business conditions arise, for example
– your Customers are less Price sensitive (so if your Labor Costs increase, they can absorb price increases)
– your location gives you an almost monopoly (for example next alternative is a few miles away, making Customers value Convenience over price)
– your Location gives you native visibility (so you don’t have to spend on awareness, mktg sales)
– long/prior History with Customer Base (so no need to spend on marketing)January 7, 2017 at 2:50 pm #65243
Thanks for weighing in, Jeremy! Great points!
On some level, the opportunity has to pass the smell test. Does this feel like a well thought out, professional experience, that is vetting you as carefully (and respectfully) as you’re vetting them? Remember, a new franchisor will be looking for franchisees that will help them grow their young brand and reputation. That means talented folks with the financial security to be able to handle a few hiccups. If your experience with the franchisor feels less corporate and more MLM, beware.