Self-Evaluation: Is Franchising For You?
Excerpts from Is Franchising For You, by Robert McIntosh, reprinted with permission.
Take almost any town in America today and on some street you will find a franchised business. So accepting has the American public been of franchising that financial experts refer to franchising as the "wave of the future." For example, sales by franchised businesses now total more than one-third of the U.S. retail market. More than seven million people draw their paycheck from a franchised business. Over half a million franchised businesses dot the American landscape. More and more people are making the decision to get involved with a franchise company with the hope of pursuing the American dream of business ownership.
The word franchise literally means to be made free. This freedom is realized through the granting of rights from one party to another. We often refer to our right to vote as a "franchise." Franchising in a business sense is a method of distributing a product or service. The franchisor owns the rights to the name or trademark and, for a fee, the franchisee receives the right to do business under the name. In most cases, the franchisor will also have a system for doing business that is transferred to the franchisee through an elaborate training program.
One of the reasons that many franchises have been so successful is that, in franchising, a business synergy is created. Franchisees brought together under one trademark can achieve things that as individual business people they could not do. Group advertising, buying power and the sharing of ideas are some examples of what can happen.
While there are many examples of successful franchises, buying a franchise is no guarantee of success. Each year there are failures, both on the part of franchisors and franchisees.
Before buying a franchise, ten important questions need to be carefully and thoughtfully answered:
Are you willing and able to take on the responsibilities of managing your own business?
Some very careful self-analysis is important before buying a franchise. Indeed, your personal house should be in good order. One of the myths that has been perpetuated is that franchise ownership is easy. This is just simply not true! While the franchisor will give the start-up training and offer ongoing support, you, the franchisee, must be prepared to manage the business. While some franchises may lend themselves to absentee ownership, most are best run by hands-on management. You must be willing to work harder than you have perhaps ever worked before. Forty-hour weeks are also a myth, particularly in the start-up phase of the business. It is more like 60- to 70-hour weeks. You must also be willing to mop floors, empty garbage, fire employees and handle upset customers.
Will you enjoy the franchise?
Sometimes people buy a franchise they think will make them a lot of money, only to find later they do not enjoy the business. The adage, "know thyself," certainly applies here. You should buy a franchise that centers in an area that you will enjoy for the next 10- to15 years.
Determine your interests and types of businesses you might really enjoy. Review the table of contents on pages 5- to 6. There you’ll find a listing of the types of franchises available today. Place a check next to the ones that might be of interest to you. You can then turn to those categories and locate the franchise companies that meet your criteria.
Are you willing to completely follow the franchisor’s system?
The very key to franchising success is the consistency of product and service customers find from one franchise to another. When you display the sign and logo of a franchise, you are indicating to customers that you follow a particular system. People who are extremely entrepreneurial in the sense that they do not like to conform to a predetermined formula should be very careful about buying a franchise.
Do you have a history of success in dealing and interacting with people?
Many franchised businesses are based on people relations. Your ability to interact well with your franchisor, other franchisees, your employees and your customers cannot be emphasized enough. A negative, critical franchise owner can be a detriment to the entire franchise system. You must have a track record of good relationships with employers, supervisors and fellow employees.
Can you afford the franchise?
One of the major causes of business failure is under capitalization. While the franchisor will be able to give you a good idea of the start-up costs, sometimes these will vary due to leasehold improvements needs and other valuables. You will need enough money to not only open your franchise, but to run it until such a time as it is profitable. For some franchises, that may take a year. Remember, it is better to start out with more money than you think you will need rather than less.
Have you carefully studied the legal documents?
Franchisors are required to prepare a document called the Franchise Offering Circular. This document will give you pertinent information about the franchise. It will also contain the franchise agreement that you will sign. This agreement will govern your relationship with the franchisor for the term of the contract. The FOC is a vital document. It should be studied very carefully and discussed with your lawyer.
Does the franchise you are considering have a track record of success?
You should get to know the principal directors of the company— their business background and how profitable their franchise has been. The FOC will contain this information. Have an accountant review the financial analysis of the franchise. Is it a solid company? Also, examine how long the franchise has been in business. A new start-up franchise may offer you the opportunity to get in on the ground floor. But it might also mean that the franchisor has not had sufficient experience to fully develop the system.
Are the franchisees generally happy and successful?
The FOC will contain a listing of all of the franchise owners. It would be worth your time to contact a number of them to discuss their experiences with the franchise. Has the franchisor followed through on commitments? Did the franchisees receive adequate training? Would they buy the franchise again? Is the business profitable? What advice would they give you?
Do you like the franchisor’s staff—those people with whom you will be working?
One of the most important elements of a franchise is the ongoing support and contact you will have with the franchisor. For this reason, you should feel comfortable with the people you will interact with for a number of years.
Do you have family support?
Managing a franchise is a full time job. It requires great sacrifices of personal and family time. For this reason, your family should understand that you will have tremendous demands on your time. Husband, wife and children need to be supportive of your decision to buy a franchise.
Yet, buying a franchise is not a 100% guarantee of success. By carefully evaluating yourself and the franchise you desire to purchase, the chances of success become greater. The following story serves to illustrate this:
Once upon a time there was a wise old hermit—a sage, an oracle—who lived in the foothills of a small town. The boys of the town enjoyed visiting this wise man and would spend countless hours listening to his tall tales and words of wisdom. Whenever they had a perplexing question, they could always depend on this wise man to give them a correct answer. They were never able to stump him.
This bothered the non-believers in the group, and they determined to construct a question that he could not answer. They captured a bird one day, and this gave them the idea. They said, "Now we will go to the old man with this bird in our hands, and we will ask him this question: ‘Old man, we have a bird in our hands and we would like to ask you one question. Is it alive or dead?’ And if the old man replies that the bird is dead we will uncup our hands and the bird will fly away and the old man will be wrong. If the old man replies that the bird is alive, we will simply crush the bird to death, and the old man will still be wrong."
Soon one of them approached the old man with the bird in his hands. "Old man, I have a bird in my hands. Is it dead or alive?" After a moment of deep thought, the old man replied, "Young man, the answer is in your hands."
Will you succeed or fail when you buy a franchise? There are not too many franchise failures, but there are people who fail. Your success or failure is really in your own hands. Evaluate carefully the franchise you desire to purchase and your own attitudes and abilities. By so doing, the wonderful dream of business ownership could be yours.