Is A Franchise Right for You?

The Right Questions to Ask

By AMY COVINGTON

One of the hardest tasks in running a business is successfully branding your product or company to the point that it becomes a household name, like Starbucks and McDonald's. Buying into a franchise can be an easier road to business ownership, with ready-made brand awareness and advertising campaigns, but this route is not fool-proof and unless you do your due diligence, you could end up back at Square One.

While buying into a franchise affords instant name recognition, which in many instances provides an existing client base and drives business to your outlet, your involvement with a franchise could also mean surrendering a great deal of control over your business operations. Depending on the franchise, you may have to adhere to guidelines regulating store appearance, employee uniforms, services and products offered, advertising and sales territory. Discovering the level of control you are comfortable relinquishing and understanding your prospective franchise opportunity's guidelines are important steps in the analytical process. Another genesis step is to ascertain how much money you are willing to invest, and potentially lose, in the enterprise. Initial franchise fees can run thousands of dollars; you may have to pay franchisor royalties; modify your store to adhere to franchise standards, fit your store with equipment and fixtures; and you may be required to contribute to advertising efforts.

Fortunately, franchises are much easier to analyze than most businesses because the franchisor is required to disclose business events that other businesses may not have to disclose. "The first thing to do is request a copy of the franchise document," said Bruce Berman, investment capital and management consultant, self-made millionaire and author of I Got Here. You Can Too! A Master's Course in Becoming a Millionaire. "In most documents there will be a list of current franchises and even recently terminated franchises. Pick up the phone and call them or drive by and visit them. You would be surprised how people like to brag or complain about their businesses." Berman, who has financed approximately 100 franchises, including photo processing stores and chain restaurants, recommends asking current franchise owners the following questions:

Berman advises contacting franchisees that left the franchisor, which should be listed in the franchise document. "Get a feel from the current franchisees how happy they are and then use the same questions as above to gauge how the previous franchisees rate the franchisor," he said. "I also would ask a few other questions. Ex-franchisees tend to get irritated with the franchisor and are usually very willing to talk to you and to ruin a potential sale for the franchisor. Try to get past the person's anger and find out the heart of the problem. If they say, 'They're crooks, I hate them,' you are not getting any information. Dig in and ask more questions." Here are a few questions from Berman's book to help you when calling past franchisees:

• Why did you leave the franchisor? The best way to find out what potential issues are is to find out from someone who's been there.
• If you are still in business, are you doing better without being a franchise? Frequently business owners will leave a franchisor. It could be for a variety of reasons. In some cases the business owner has built up a loyal customer base and in others the franchise was a bad concept. Find out why and it will help you with your decision.
• What should I look out for if I buy a franchise? Who better to give you the scoop than a previous owner.
• If you were going to buy a franchise from a different franchisor, in the same industry, which one would they pick and why? Sometimes business owners like the industry they are in but find out other franchises offer a better deal and more profits.
• Did the franchisor make any statements or representations you feel are untrue or overstated? If they lied to them, they will lie to you.
• Do they like the business they are in or do they think it is a bad industry? Being in the right industry is very important.
• What other industries do they like for franchises? This will give you an idea of other ways you could make money.

There are many clues to glean from the franchise document itself, including the business experience of the franchisor management. Are they new to the business or franchise industry veterans? Do they have experience in customer support or are they all salespeople? "If the management is heavy on the marketing side, you can expect to be sold. If the management is heavy on the industry side, you can expect good customer support and new products," Berman said. Other things to consider, according to Berman's system of analyzing franchise opportunities, include whether the company has a patented product or a trademark that is well known and instills quality. "Patents and trademarks are what keep a business going for many years," Berman said. Other things to factor are litigation status and individuals claiming rights to their product?

The franchisor's financial statements should be enclosed in the offering document. "They are a wealth of information," Berman said. "Read them and understand them. Show them to an accountant friend if you don't understand accounting."

The statements should reveal the fiscal stability of the company; if they are not doing well, how are you expected to do well? "Where is their profit? Is it selling franchises or selling products to the franchisees? I would prefer to see the majority of their profit in selling products to franchisees. That at least gives an indication that the franchisor is devoted to you selling products."

If the profit margin for the franchisor is high on the products they sell you, you will have to charge your customers more for the products you sell them - making it tougher to compete against a non-franchise. Not only do you want to keep the price of your products competitive, you want to believe in your product. "Does the franchisor reinvest money in product development and enhancements? Staying on the cutting edge lends credibility to consumers' belief that your product has long-term viability," said Berman.

"Opening a business is an adrenaline rush. There is nothing more exciting than opening your first business. If you can open a business, you are a winner. Whether or not the first business you open succeeds or doesn't make as much money as planned, you're a winner. Once you learn how to open a business, you will always know how to open a business. The trick is to make money off the hot ones while you can. Learn from the not-so-hot ones and don't make the same mistake twice."

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