Researching A Franchise Step-by-Step Lloyd Shears Let's assume, for the purposes of this article, that we have found 3 or 4 franchise companies in which we are interested and plan to do research to find out which, if any, is the "right" one for us. It's a good idea to have a look at several top quality companies and several industries prior to deciding on a single franchise system. Decide at this time the amount of money you are comfortable investing. Meet with a banker (all major banks have people who specialize in franchising) and discuss financing needs. Once you know how much money you will be investing, stick to looking at companies in your investment range. The business you buy should be a "vehicle" to get us to your destination. View it this way. If you live in Calgary and want to go to Halifax, you have options. You can fly, drive, bicycle, walk. They will all get you there, but at very different speeds. If you need to be there, say within 2 weeks, your options begin to close. Now, only the plane and driving will work for you. Apply the same thinking to the business you are buying. Will it take you to your destination? Ask yourself a few simple questions: 1. Can it make the amount of money I need (in 2 years, in 5 years)? 2. Will I work the hours I want? - be realistic - if the business is open 16 hours a day, be prepared to work those hours. 3. Can I afford the business ….. both in dollars and emotionally? 4. Does my family understand the business, and are they supportive? This is a very critical time for you and your family. Be sure to involve them throughout the process, and be sure they are getting their questions answered as well as your own. Let's get started: Using our assumptions from the first paragraph, we will have a franchise kit, and perhaps a video from the franchisor. This kit cannot possibly be expected to answer every question, and is not designed to do so - though some will be better than others. Don't assume that the glossiest kits come from the best companies, as this could be totally the opposite. Only research can reveal this. Once you have reviewed the brochure, and if you are not interested, call the franchisor and let them know that you will not be pursuing their franchise - this will save them from calling you, and you, from an unwanted call from the franchisor. If the franchise has interest for you, make a list of initial questions. These might include some questions on availability in your market place, investment range, financing package, etc. During this conversation, request a copy of the Uniform Franchise Offering Circular, (UFOC). This is a standard document, which franchisors give to prospective franchisees. You will be asked to sign a receipt for this document, and it commits you to nothing. Providing you with this document 10 days before a purchase is law in the United States, and the province of Alberta. It isn't required by law as yet in the other nine provinces, but the better quality franchisors will be happy to supply it. This document is the beginning of finding out if a franchise is right for you, and, if you are right for the franchise. Note, the first word is "Uniform" - it means everyone gets the same deal. The franchisor will give the same agreement to everyone. The UFOC will begin to give you much of the background, and speed your research of a franchise company. A few of the key areas to turn to first in a UFOC are: Financial Statements: Remember, you are buying a franchise for the ongoing support of the franchisor. You want to see strong financial statements, indicating that the company will be in business to give you the support we buy a franchise for. Litigation: Is the franchisor suing or being sued by anyone. This tells you how a franchisor handles disputes. Once we are satisfied that the company is financially solid, and there is little or no litigation, we can turn our attention to some other important details which will be provided in the document: Time in business and number of franchises: It is reasonable to assume that a franchisor who has been in business 15 years, and has 300 franchises is a more solid investment than a franchisor who is just starting out. Franchise Fee: This is a one time, up front amount of money we pay the franchisor to cover their costs of assisting us into the business. $20,000-$25,000 are very usual amounts. Royalties: This is an ongoing amount of money we pay to the franchsisor - usually a percentage of gross sales. These will vary from company to company, and industry to industry. I have seen everything from 3% to 15%. Remember to focus on how much you keep - not on what you give away. Advertising: What percentage of your sales will you be required to contribute to an advertising fund, and what advertising is presently taking place, in your market area? Terms: How long is the franchise agreement for, and what are the conditions of renewing your franchise agreement for additional terms. Ten years is a very standard contract. Termination: Every agreement will have a clause dealing with termination. This sets out the conditions under which we can terminate our agreement with the franchisor, and the conditions under which the franchisor can terminate our agreement with them. Territory: Does the franchisor give us the rights to an exclusive territory - or do they reserve the right to put in as many units as they wish --including one next door. If you don't get an exclusive territory - be very cautious. Training: How long is the training, where is it, who conducts it, and what aspects of the business are covered. Assignment: Do you have the right to assign the business to your spouse, partner or child. Sell Out: What are the conditions of selling your business, and how much will the franchisor charge for their involvement. · Note: The reason we buy a business is to create wealth for ourself and our family. This business will be sold at some point, so go in knowing how we will exit, and what it will cost. Site Location Help: If it is a site sensitive franchise, will the franchisor help with finding a location? Manager Policy: Does the franchisor have a policy of wanting franchisors to run the business (most will) or do they permit manager run franchises. We have now had many of the pieces of information we need supplied to us in the document. This should also have raised some questions. If this is a family decision, be sure everyone has their questions written down, so they can be answered. Phone the franchisor and ask any questions, and for any explanation you wish. This is also a good time to ask about a possible meeting with the franchisor. Many franchisors will have "Discovery Day". This is a day where you meet with the various departments of a franchise company. They are evaluating you for their system, and you are evaluating them for your investment. You may even wish to tentatively set up a meeting date at this time. Now, back to the UFOC. It will have a list of all the franchises in the system. Their address, phone number, and frequently, how long they have owned their franchise. A second list will give the same information on anyone who has left the system for any reason in the past year. This is where we get into the fine points of deciding on a franchise's suitability to us. We talk to the people already in the system. So far, we have not talked about the earning potential of a franchise, and how you research that. Most UFOC documents will not discuss earnings potential in any way. This is because, in areas covered by franchise legislation, any representation of earnings can be interpreted as a guarantee. (Do not confuse a proforma statement in a franchise kit as being any guarantee of earnings). Also, the best place to find out the earnings potential of a franchise is from the franchisee in business. Let me give you a list of potential questions to ask a franchisee. Always begin the conversation by carefully identifying yourself to the franchisee - For example "My name is Lloyd Shears and I have been speaking with John Smith at your Head Office. I'm thinking of joining your franchise company, and was hoping you could give me a few minutes of your time - is now convenient?". If it isn't convenient, ask if you can call back some other time (set up an appointment), or give them your phone number and ask them to call you (collect, if it's long distance). Some questions you should ask the franchisees are: · How long have you been in business? · Are you happy with your investment? · Would you invest in this franchise again, if you had your time back? · Did the franchisor fulfill its obligations to you when you opened the business? · How is your relationship with the franchisor? · How is your advertising money spent? · Have you every had a serious problem with the franchise? If yes, how was it resolved? · What is the strong point of your franchise? · What is the weak point of your franchise? · Do you feel you receive value for your royalties? · Does your franchise perform above or below average for your franchise system? · Can I expect to make money my first year? · What advantage does the franchise give you over competitors? · Do you have a franchise advisory council? · Are you familiar with any failures in the franchise in the past year? If so, do you know why they failed? · Could we set up a personal meeting? (offer to buy lunch). Now, let's talk money. There is little if any point in phoning a franchisee and asking them how much money they make. Most simply won't tell you. However, if you take a "consulting approach", you will find your answers. For example: · "If I buy this business, is it realistic that I would achieve sales of $250,000 in my first year and have profits of 25%?". This will start the conversation, and if the answer is yes or no, ask them what they think is realistic for year 1, year 3, year 5? If the person you are talking to is happy, ask them if they can refer you to someone who is not. And of course, if the person you are speaking to is unhappy, ask them to refer you to someone who is happy. Just like every job, sports team, church group and family you have belonged to, not everyone will be happy or unhappy. Make sure you talk to people who are happy, prosperous and making money and to people who are not. Make sure you have investigated the two sides of any system. Make sure the happy franchisees are in the majority and that you identify with, and will operate your business, like the prosperous franchisees. Only buy a business where you identify with the winners. No article of any length could cover all the questions one might ask before going into business. It will take 20 to 30 hours over a 4 to 6 week period to properly investigate a franchise. It's O.K. to look at a business and say "Yes", and it's O.K. to look and say "No". Both are business decisions. However, make your decisions based on facts, not perceptions. Be sure you are using a lawyer familiar with franchising, an accountant who understands small business, and a banker who is familiar with franchising. Feel free to call any of our offices across Canada if you need additional help.