If you search the Web for tips on franchise buying, there is no shortage of articles worth reading. Though many do a great job of explaining such topics as how to avoid purchasing a failing franchise, understanding the FDD, getting your financing in order, etc., most fail to touch on how to make the decision, especially when you think you might have a company in mind. The following five tips will help you as you enter and exit the discovery phase of your franchise buying process.1) Don’t be enamored by the best in the group.
Too often, potential candidates make a decision based on the results of the number-one franchisee in the system. The new candidate enters with delusions of grandeur, instead of realistic expectations.
Of course, it is great to aspire to be the best, but would you put hundreds of thousands of dollars on the line because you hoped to be like Michael Jordan? Instead, make your decision based on the five or six franchisees that fall right in the middle of the pack. Ask yourself:
- “Can I do what these franchisees are doing and get at least the same results?”
- “Can I live with my return on investment if average is all I can be?”
It is great to know what separates the top 20 percent from everyone else. Caution is still warranted. Here are a few questions you should ask the successful franchisees:
- How long did it take you to get here?
- How many franchisees were in the system when you achieved this status?
- How many times have you fallen in and out of the top 20 percent?
I’d also want to get a list of the people who achieved top 20 percent status in the last five years. Earning this status during the booming economies of the ’80s and ’90s is much different than doing it today.2) Spend a few weeks to a month walking the walk BEFORE you buy.
This is important, if your agreement requires you to be a working/onsite owner. Yes, it will cost you money and time. And, chances are, you will have to do this out of state. The franchisee two miles from your home is not likely to let you have the run of his shop for a month. Would you?
But, what you will learn about the business and about yourself is worth EVERY penny. I can’t tell you many buyers have said, “This isn’t at all what I thought it was going to be like.” What a horrible thing to learn after you’ve invested your 401K and moved across the country.
Nothing is ever exactly as it seems until you do it. So invest the time and the money. Do it, even if your franchisor may not be a fan of this approach. If they so NO, run! At the end of a month you’ll have a clear idea about what you are up against, and if you decide to move ahead, you’ll be a more successful franchisee. 3) You may be a better entrepreneur than a franchisee.
Many people enter franchising with the wrong ideas. They think the brand will bring in the clients or the support team will do all the work. They buy in because they think that franchising will allow them to get out of their business faster, and to some extent that’s true, but only AFTER years of hard work and paid dues. In the end, you still own your business. Though there is huge value in the support of a franchisor and a peer network, your success is still dependent on you! (See the “Franchise Obligation Is a Two-Way Street”
Here are a couple of questions to ask yourself:
- Why aren’t you starting your own business?
* If you are afraid of the long hours and hard work and risk, franchising won’t help you.
* If it’s because you want systems and support and a roadmap, then ask the next question.
- Will you really use it?
* If you can honestly answer yes, understanding exactly what the franchisor is expecting you to do in return, then you are making the right decision.
* If even part of you hesitates, if you think “I can do 70 percent of it,” think again.
That isn’t to say you can’t innovate as a franchisee. However, the most successful franchise owners understand that they earn the right to innovate through successful application of the system. If your real drive is to go your own way, then do so.
4) Don’t make your buying decision based on the executive or support teams.
Some of the smartest, most passionate people I know work for franchisors. At discovery day, we give compelling reasons to buy. However, some buyers make their decision because they like the people. They look at the exec and support teams and think, “I like these people. They are smart, they are funny, they seem trustworthy. I’d like to work with them.”
In theory, it is a great way to make a decision. After all, we want to work with people that we like. Unfortunately, it’s not a great way to invest.
I’ve worked for the same franchisor for less than 15 years. In that time, we’ve had three different CEO’s, multiple executive teams and a changing of the guard on our support teams that can be compared to birds flying south for the winter. People come and people go. There is a very real possibility that everyone you meet and like today will be gone in the next few years. Yet, your franchise agreement will last for 10, 15 years or more.
Though it will be tempting to make your decision based on the people, don’t do it. Don’t even decide based on the franchise’s vision, since that changes as fast as the leadership does. Consider it? Yes! But instead, make your decision on the brand, on the model, on the durability of the industry as a whole. Make your decision based on the other franchisees; especially those that have agreements with a similar time commitment to yours.
When all of the people at headquarters have long since left the building and the vision has been trashed for something new, you will need the ability to stand together in an effort to preserve your brand and your business. As much as we want you to like us, as much as we design it that way...it is in your best interest to consider us a limited resource.5) Be wary of, “we do it this way for the bank.”
Some franchisors will encourage you to submit a proforma to the bank that is not reflective of how you will run your business. Others will ignore their own recommended system standards, allowing you to skimp on equipment or people just to get financing approved. Once the buying process is started, it is easy to focus on getting the loan instead of creating a successful business. Don’t fall into this trap.
For the past few years, everyone has been talking about how home owners were coerced into buying more house than they could afford. Somehow we missed the conversation about business owners being coerced into applying for and accepting loans that are not sufficient to support the day-to-day needs of their businesses.
Too often, this happens at the hands of franchisors that just need another sell. It is not malicious. Most franchisors make these bets on your behalf because they believe that a little extra support will “pull you through.”
Unfortunately, lack of funding and lack of time cuts this extra effort short more times than anyone wants to mention. Most franchise agreements allow you to get all or most of your fees back if a loan cannot be approved. This is your protection.
Make sure your proforma includes a request for all the money you need to succeed. Don’t take short cuts on equipment, staff or location. If the bank won’t provide enough money and you can’t find it from another source, walk away.