How To Research A Franchise and Avoid The Ambush Lloyd Shears To reach the research stage you have to pass "The Ambush", so let us begin there. The three usual sources for the ambush are spouse, friends/neighbours, and ourselves. THE SPOUSAL AMBUSH This is the most familiar one. When a client comes into my office without their spouse, I always ask if the other spouse is supportive. I always hear, "Yes, anything I want to do is fine, we have talked it over." That usually lasts until the aspiring business owner arrives home with information on a few franchise companies. The questions and concerns then begin to flow. What appeared so hopeful just a few days or hours ago now looks doubtful. The solution is to have both spouses involved throughout the whole process. Owning a business is a family decision and requires both partners to be brutally honest but fair with each other about the benefits and problems of business ownership. If it is not possible for both spouses to be involved throughout, make a list of relevant questions so that all concerns are addressed. THE FRIEND AND NEIGHBOUR AMBUSH We all love to be asked our opinion! And we love to give it! Knowing nothing on the subject will rarely deter us, either. The solution is, based on the business experience of the friend, give each opinion the value is deserves. THE SELF AMBUSH There is a big difference between casual interest and research. Expect to have doubts and to get cold feet along the way. The solution is to continue on with your research to overcome this. If you feel your market area is "different", speak to existing franchisees about their areas. You will find many similarities. Looking in the Yellow Pages and counting the number of competitors is not research. It may be interesting, but does NOT tell you if an industry is under-served or over-served. If you are introducing the industry leader to your community, the competition may simply have loosened up the marketplace for you. You need the input of the franchisor and franchisees to assist you in determining your potential. Ask existing franchisees how they made their determination. The first step in doing research is to make sure your family is supportive and getting the information they need. Have in mind goals of investment size and the income you need to generate. Keep in mind that the amount you invest will not necessarily dictate the amount you are going to make. A good starting point is to make sure the industry is stable and not a fad. The product and/or service provided should be of excellent quality, something that is needed, and where you will not be competing with industry giants. All franchisors are not going to be equal. Statements like "franchises are safe" or "franchises are risky" are of little use by themselves. A company which has been in business for ten years and has 300 franchisees is almost certain to be a more stable investment than the company with eight franchisees who started last year. Franchisors have to learn the franchise business. The "holy spirit" of franchise knowledge does not descend on a new franchisor and endow them with everything necessary to be successful. Statements like "someone had to buy the first McDonald's", while accurate, overlook an even more important point. For every franchisor who makes it big, there are many who did not make it at all. BUY FROM THE INDUSTRY LEADER. The first step in pursuing a franchise (see my article in the November edition for help on goal-setting to choose a business) is to contact the franchisor to receive information. What will arrive usually consists of a literature package and a video. Be sure to share this with your family right away and together make a list of questions. While you may want to have a good look at a number of top quality franchises, it is all but impossible to do proper investigation on more than two or three at a time. (It has long been my experience that people who set out to look at everything, buy nothing). Should your first impression of the franchise be favourable, fill in the confidential questionnaire which the franchisor will have included with the other literature, and return it. (If you are working with a consultant, they will fax the questionnaire you will have filled in for them). This questionnaire will request both personal and financial information. Giving this information to the franchisor is how you tell them you are serious and capable. NOW IT IS YOUR TURN TO GET INFORMATION All 50 American states and the Province of Alberta have specific laws governing franchising. These laws require the franchisor to provide to prospective franchisees a document called a Uniform Franchise Offering Circular (UFOC). In Alberta, you MUST get it, it is the law. However, if you are in any other province, ask the franchisor if they franchise in the US or Alberta. If they do, request the UFOC. It has a copy of the franchise agreement, a list of franchisees, a list of franchisees who have left the system in the past year, financial statements and a disclosure of any litigation. It forms an important part of your research. If the answer is no, they do not franchise in the US or Alberta, they may not have the UFOC document to give you. In this case, request a list of ALL franchisees, a copy of their latest financial statements and a copy of the franchise agreement. Financial statements are essential to making an informed decision. Begin by reading the UFOC carefully or, in its absence, the franchise agreement. Mark any parts that are unclear to you for discussion with the franchisor and, at a later date, with your lawyer. The single most important thing you must do, however, is speak to franchisees. Armed with the list of questions you have created, plan to speak with at least 12. You want to speak with franchisees who are just starting, and those who have been in the system for many years. The new franchisees can give you a perspective on what it is like to train and go into business, while the more mature franchisees can tell you what to expect as your business and your relationship with the franchisor matures. In your research with the franchisees, make sure you speak with both people who are happy and prosperous and those for whom the business has not been successful. Make sure you identify with and will run your business like the people who are successful. Also, check that the vast majority of franchisees are positive, and confirm that they would purchase the business again if given their time back. Use this opportunity to schedule a time to meet person-to-person with franchisees. Be respectful of their busy schedule and the demands of running a business. There is usually no point in asking people how much money they make, but if you ask the question in an indirect way, you will get the information you are seeking. For example, "Is it realistic that I will be able to achieve $500,000 in sales in my first year, and a profit of 25%?" will open the subject in a way that permits the franchisee to respond and reveal any information they are comfortable discussing. And ALWAYS ask if the franchisee would recommend investing in this system. If you are still getting the "go" sign from your research, the next step is to visit the franchisor. It is beyond me why so many people want to skip this step. In fact, I would not invest in a franchise which does not insist on a face-to-face meeting prior to going into business. Many franchisors have "Discovery Days". These are research days where the franchisor invites prospective franchisees to view the company and meet with the people you would work with should you decide to buy. Ask whatever questions you want and even if you are positive this is the franchise for you, go home and think about it for a week. Speak to the franchisees in the system who helped you, and discuss your visit to the franchisor with them. The final step is to have the documents reviewed by a lawyer familiar with franchising. It is also time to get some accounting advice from an accountant experienced in working with small business. I appreciate that it may sound like a lot of work and point of fact, it is. It will take you 20 to 30 hours over a four week period to research a franchise. You are doing this for you and your family. Only the best is good enough. DO NOT SETTLE FOR LESS THAN YOU WANT! The right business is out there.