Researching YOUR Franchise: the Next Key to Success! Howard Bassuk We have talked in previous articles about how to identify what your personal objectives are in selecting the kind and type of franchise opportunity that would fit your personal skills, goals and strategies. Armed with that model you are ready to look at specific franchises to see how they and you fit together. Knowing who you are and what you want to achieve in business will help you to identify businesses that match up with your goals and strategies. Once you have identified a few of those businesses you are now faced with the biggest and most important task in selecting the franchise system you ultimately become part of: RESEARCH! Doing research on a franchise is a lot like peeling an onion. You do your research layer by layer until you reach the center. You MUST be prepared to walk away from any and/or all of these businesses if, as you peel away “another layer of the onion," you find something that does not properly match up with your personal abilities, business strategies, or ethical standards. Doing the research takes time, but it is not hard. There are several musts, and you must do each and every one to insure yourself the best chance of making a good decision. We have already said that we want to make sure that any franchise organization that you investigate should meet certain criteria. Briefly, any franchise you become interested in should: 1) Be in a Stable Industry. 2) Be a leader in that industry (whether the industry is large or small). 3) Be Affordable to you. 4) Be Very good at the core business that you will be in. 5) Have room for you to expand and grow. 6) Have good future vision for growth. 7) Be in a non-consolidated industry (your competition is not made up of major chains with great competitive strength). 8) Has a much needed product and/or service and is an excellent provider. 9) Has an acceptable level of risk from YOUR point of view. 10) Is an ethical, and franchisee friendly franchisor with happy successful franchisees. Having satisfied yourself that the franchise you are looking at meets the above criteria, you now focus on the issue of the specific franchises you are interested in, and how YOU will fit in. These are the research steps you will want to do to accomplish this: 1) Review the franchisor’s basic brochure and video. 2) Create a list of general questions. 3) Fill out the questionnaire. 4) Arrange to receive the Uniform Franchise Offering Circular (UFOC). 5) From the Uniform Franchise Offering Circular, make a list of key information. 6) Use the list of franchisees in the U.F.O.C. and plan to call 10 to 20 franchisees. 7) Plan to visit 3 to 5 franchisees in person after you have completed your telephone survey. 8) Plan to visit the franchisor’s home office. Make sure the people there have the necessary management skills to help you succeed. 9) Use the services of professional advisors: including an attorney and an accountant experienced with franchising. Start with the sales literature. Read the brochure that all franchises have. If there is a video, make sure you see that too. TRY TO GET A COPY OF BOTH AND SHOW THEM TO OTHER FAMILY MEMBERS. You will want their opinion, and their support, and the more they know, the less likely they will be afraid to join you in supporting your dream. As you talk to others, including friends, relatives, etc. seek their opinions. But, beware of well intentioned people who are ignorant as to how a particular business works. Comments like “all franchises are good” or “all franchises are bad” are ridiculous and won’t help you. Don’t get scared off if you hear them. Stick to your investigation. The truth will soon reveal itself if you see it through your own eyes, and are thorough in gathering your information. As you get the sales brochure and/or videos, sit down with a clean piece of paper and write down all the questions that come up as you read the literature, and/or see the video. Then when you speak to the franchisor, ask them EVERY question that you have. Never be afraid that a question is silly, stupid or unimportant. This is your business and your future, and it is critical that you do it right! Next, have a discussion with the franchisor. Begin to get a sense of who they are, and what they do. Be very careful to see if the franchisor is trying to see who you are too. If they are not interested in you, and whether you fit their opportunity, they are not the kind of franchisor that I would recommend to you. During your discussion with the franchisor, assuming you are still interested in learning more, make commitments as to what the next steps will be. Make sure you honor any commitment you make, and make sure the franchisor does the same. Then fill out the questionnaire that you will find in the sales literature. If you work with consultants or brokers, they may already have given you a questionnaire to fill out too. Do fill them out. The franchisor will want to see who you are and what your background is. If you are working with consultants or brokers they will need to know the same things. An additional bonus with a consultant is that their questionnaire may be acceptable to the franchisors so you may not have to fill out more than one! The franchisors will not take you seriously if you do not fill out their questionnaires, since they will see that as lack of commitment on your part. If you want them to invest time and effort in you, you must do the same in return. Once you have filled out the questionnaire, the next step is normally for you to be given the legal disclosure document called the Uniform Franchise Offering Circular (Also referred to as disclosure document, offering circular, UFOC, etc.) If you meet the franchisor face to face, and you discuss the sale /or purchase of the franchise, you must, by law, be presented with this document at that meeting. When you get the UFOC you will sign a receipt, which you will also date, to prove that you have received this. From the date that you get this document, you will not be allowed to purchase this business for 10 working days. However, though you will NEVER be obligated to buy anything, ever! Read this circular CAREFULLY! See if there are any deal breakers here. There will be all sorts of good information in it on over 20 different topics, including the background of the officers, any litigation that the franchisor is involved in, audited financial statements on the franchise company, your costs and obligations, their obligations, any statements on projected sales and/or earnings and perhaps, most importantly, a list of all the franchisees! To me, this list of franchisees is the key to the entire selection process. I would recommend that you think of the other franchisees as your best opportunity to insure that you are making a good decision. You should contact a minimum of 8-10 of the franchisees the very first week you are doing research, and talk to them. Have a series of questions ready to ask them. You are not only trying to discover how well they do, and how they rate their franchise experience, but also WHO they are, compared to who you are. One very key element in doing your franchise research is to confirm that most of the franchisees are doing well, and would join the system again. You should also make sure you seek out and find some franchisees who are doing extremely well, and also some who are doing extremely badly, or have failed. You want to make sure that the business is not only a good business in general but that the people who do well in it run the business the way you would. If you find that you would run the business more like the people not doing well, disqualify that system from your search immediately. While franchisors will often tell you the names of successful franchisees, they may be hesitant to tell you the names of those who are struggling and failing. Don’t let that deter you. Ask the other franchisees who they know is NOT happy. Chances are that they know each other and will be willing to give you names. When they do, also ask if they have an opinion as to why that particular franchisee isn’t succeeding. Sometimes it can be as simple as bad management, or bad location. If not, keep using the list until you find some. Remember just like a job, not all people do business equally well. When you interview the franchisees, ask any questions you like. Be tactful, and discreet. Make sure the time is convenient too. Below are some sample questions that you may find helpful to ask when you are investigating. 1) How long have you been in the business? 2) How are you doing in your business? a) Are you pleased with your earnings? b) If the franchisor made earnings statements in their UFOC, are your earnings close to what the franchisor predicted? c) Are you working full-time in the business? d) Do you see your volume growing? What is your best estimate of your annual growth? 3) Do you find that your location meets your customers’ needs? Who picked your site? 4) Are there seasonal highs and lows? 5) How would you rate your ongoing support? 6) How would you rate your training? 7) Does your franchise support you with advertising and promotional programs? 8) If you had to do it again, would you buy this franchise? 9) Are you aware of any franchisees that are not doing well? 10) Would you share some of your monthly costs of doing business with me? $                     Rent $                     Utilities $                     Advertising and Promotions $                     Labor Costs (or payroll) $                     Insurance $                     Other 11) How much capital do you recommend? After you have spoken to at least 10 franchisees, go back to the franchisor with questions. Once they have been answered, call more franchisees and verify the answers. If you are satisfied with the answers, Make appointments to spend time with at least 2 or 3 to visit them in their in their locations. Use this time to really get a sense of the business. Go back if you need to, but make sure you understand the operation, and that you are comfortable and confident in your ability to manage the business successfully. Also make sure you seek out the right type of franchisees. If you plan on having multiple stores, or locations, talk to some owners who are still building them, talk to some owners who have succeeded in establishing multiple units, and talk to some owners just starting up to see if anything has changed from when the more established franchisees started. Continue to talk to the Franchisor. Don’t forget to use any and all professional advisors to help you during this process. Accountants, financial planners, consultants, SBA and Score advisors, are all good resources. Call the American Association of Franchisees and Dealers (619-235-2556 or 800-733-9858) and find out if there is a local Franchisee chapter. Check with that chapter. If all has gone well so far, you are finishing up your franchisee research. Plan a trip to visit the franchisor’s headquarters. Many franchisors will require this, but if they don’t you should insist. Don’t go if you aren’t pretty sure that this is the right business for you, so that you don’t waste a lot of time and money on long distance travel. If the franchisor near you, visit them as early in the process as you can.. Some people have a tendency to try to cut corners here, and not make the trip. It is a very bad idea to scrimp on your research. Both this step, and then the last step of taking any contracts to a franchise attorney are critical. Remember, joining a franchise system is a lot like getting married. Would you get married without meeting the bride? I hope not! The last step is to go to an attorney. Make sure it is a franchise attorney, so that you have an expert in franchise law. Many consultants can give you lists of local attorneys, but a great resource here is the American Association of Franchisees and Dealers (AAFD). They have a legal line with franchise attorneys from all over the country. There is also a flat fee, so you won’t have any expensive surprises. After this last step you are ready. The process may seem arduous and long, but it is really not that bad. The key is not to settle on a business that you don’t fit well with, or that is not of the quality that you need. Researching each business carefully, and not only analyzing them, but also comparing several to each other, should be the key to doing a good job on making a good decision for yourself.