Franchise opportunities are often an excellent option for would-be entrepreneurs who want to enter the marketplace with a proven business concept and marketing support.
But before buying into a franchise, it’s important to carefully assess the opportunity.
The first step is to understand the franchiser’s motivation. Franchisers look for opportunities to expand their business without committing new capital or taking on additional liability. They set the terms of the agreement and the amount of royalties they receive from the franchisee. Franchisers’ long-term success is based on royalty growth; therefore, they are looking for people willing to dedicate the time and money needed to make their business a success.
The second step is knowing what to look for. Before buying a franchise, know the answers to these questions:
1. Does anything distinguish the franchise from the rest of the pack?
2. Is its product, marketing or name unique enough to make it worth the franchise fee?
3. Does the franchiser continually come up with new programs and products that add value to the system and increase its ongoing franchise royalty?
4. Is the industry in a growth cycle?
5. Is the business a passing fad?
If the franchise opportunity has passed the test so far, investigate deeper into the franchiser’s business and financial status. Look carefully at the disclosure statements. All states accept and some require the Uniform Franchise Offering Circular (UFOC), which offers detailed information about a franchiser’s financial and business practices. This document is essentially a prospectus for the franchise.
The disclosure statements should include information on the management team, including resumes; recent financial statements; a list of existing franchisees; a franchise agreement; training and support systems for franchisees; restrictions on equipment and supply sources; and other important items like the lease term, required trademark usage and franchiser options on default, and the expiration or termination of the franchise agreement.
Once the disclosure statement is reviewed carefully, franchisees should take a closer look at the franchise agreement, particularly in the following areas:
Franchisee obligations: The franchisee must understand what operating standards he or she is bound to, as well as other business procedures, like accounting systems.
Franchiser obligations: Is the franchiser obligated to help the franchisee find a site, design and construct a facility, supply financing or provide ongoing consultations during the term of agreement? And the potential franchisee should ask what fees are charged for these services.
Territory and trademarks: Is the allotted territory large enough to grow the business? How is the trademark protected legally, and are there federal or state registrations?
Agreement renewal and termination: Normal franchise agreements last five to 20 years. It’s important for franchisees to ask how an agreement can be terminated and what the penalties are, if any.
Finally, the last — and possibly the most important — question any franchisee must know the answer to before signing the agreement is, “Is the franchise right for me?” Some soul-searching needs to be done on individual skills and abilities, including the abundance, or lack of, the key ingredient needed for success, entrepreneurial stamina.
B>Louis P. Stanasolovich, named as one of the best financial advisors in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm’s Web site is www.legend-financial.com.
