Question: What should I know before investing in a franchise and how do I get the information I need?
Answer: The approximately 3,000 franchise operators in the U.S. are regulated by the Federal Trade Commission, which requires them to make specific disclosures to prospective franchise buyers, including their background information, the costs of entering the business, pertinent legal obligations on both sides, statistics on franchisee performance, and audited financials.
This information is typically compiled in a Franchise Disclosure Document, previously known as a Uniform Franchise Offering Circular. Ask any franchise outfit you’re interested in to provide you with their FDD and read it carefully. Don’t stop there, however: Buying a franchise is a major investment–somewhere between $35,000 and $1 million, depending on the type–so you can’t simply rely on what a franchisor tells you. Do your own research.
Start by evaluating what you’re good at and what you like to do. If you’re not a people person, owning a franchise that employs dozens of workers is likely to be a bad fit. If you don’t like ice cream, investing in a Baskin-Robbins (DNKN) is probably not for you. “Business ownership is not easy. It’s a challenge for a lot of people, especially those who’ve come from working as an employee in a structured environment,” says Jeff Dudan, chief executive of AdvantaClean, a Huntersville (N.C.) business that has 90 franchisees cleaning up water damage and mold in 27 states. “You want to join a system run by people you respect and can connect with. And you should feel comfortable being aligned with that brand’s vision and values.”
Some franchisors employ brokers or companies called “franchise consultants” or “franchise coaches” who are paid fees or commissions for bringing in qualified leads that convert to franchise buyers. These people can help prospective franchisees like you evaluate your own skills and save you time by narrowing down your best options in terms of cost, industry, and business opportunity–and they won’t charge you.
However, you should ask any franchise consultants you contact how they are paid, how many franchisors they represent, and how they will look out for your interests. You want to avoid being steered into an expensive outfit because your consultant gets a larger fee from that franchisor, for instance, and you don’t want to pay a higher franchise fee to cover a broker’s commission, unless you’ve agreed to that upfront.
Along with buying into an established brand and benefiting from shared marketing and advertising, one of the main advantages of owning a franchise over starting an independent business is the corporate support offered. Talk to existing franchisees about what kind of training they got before they opened and what kind of online and offline learning opportunities their franchisor offers, suggests Shelly Sun, CEO and co-founder of BrightStar Care, an Illinois-based franchised home-care staffing service.
Don’t limit yourself to a few conversations–draw up as many detailed questions as you can think of and speak to as many franchisees as possible, visiting several in person if you can. Ask the franchisor about franchisees who have left the system and see if you can track some down and speak with them. It can be particularly enlightening to speak to terminated franchisees. Of course, take what they have to say understanding that many times when people fail at something, they are quick to blame anyone but themselves.
Realize that starting a new franchise outlet is not your only option, says Michelle Seiler-Tucker, senior managing partner at Better Business Brokers in New Orleans. Although she sells both new and established franchises, she often recommends buying existing locations from retiring franchisees because they have loyal customers and ongoing cash flow. “In most cases, startup businesses and new franchisees will operate in the red for three to five years, spending a tremendous amount for inventory, furnishings, equipment, signage, hiring—without any money coming in,” Seiler-Tucker says. “In most cases, you can buy an existing franchise location for less cost or for the same price, and it has many years’ worth of established clients and money coming in from day one.”
If, after you do your due diligence, you are seriously considering investing in a franchise, sit down with three experienced businesspeople you know and run the idea past them, asking them to be honest with you about their reactions, advises Edward Kushell, president of the Franchise Consulting Group in Los Angeles. “Tell them what you found out, what kind of money you’re putting in, and then listen to their advice. Many times, people who want to buy are so anxious to get into their own business, they aren’t objective about it.” A failure usually means a large financial loss and sometimes a costly legal dispute with the franchisor, he says.
That’s why you should have an attorney who specializes in franchise law look over any legal agreement you are asked to sign as part of a franchise purchase, he adds. These agreements are written not to protect you, but to protect the rights of the franchisors: “A majority of franchisors will ask you to sign the agreement as is, and say they don’t allow any changes, so there’s sometimes a strong intimidation factor,” he says. “There are agreements that have language in them I’d never advise anyone to sign, such as territorial rules that allow the franchisor to open up a company store in your territory and compete with you. If you find the terms of an agreement onerous, you walk away.”
Some additional resources: The Federal Trade Commission offers a guide to buying a franchise. The International Franchise Association has an “about franchising” page, and a searchable database of franchisors. Dudan recommends that prospective franchisees read The Franchise MBA by Nick Neonakis (May 2013).