Franchise Deals

Franchising can be a great way to get started but don't let the sales hype and excitement get in the way of making good decisions. 

• Within the last month 3 submarine sandwich shops (a major national chain) have gone down under the auctioneer’s hammer within 10 miles of our office.  None of them lasted over 18 months.
   

• The latest and greatest hot donut franchise (well it was hot 4 years ago) just closed its flagship store in our area. 
   

• The new “dollar price concept store” just a half mile from here lasted 4 months.
   

• A medical doctor we know put $15,000 into vending machines that he and his partner were going to place in businesses and make a bundle.  His net return on investment was zero.

On the other hand, hundreds of thousands of people have built very successful businesses by tapping into the power of franchising.

Here is a checklist for you to follow when evaluating a franchise opportunity:

1. How long has the franchisor been in business?  Be careful of start-ups.

2. Does the franchisor follow all governmental registration, reporting and disclosure laws?  You need to know what these regulations are and find out if they are in compliance.

3. Have a knowledgeable lawyer review the franchise agreement.

4. Be especially wary if you are pressured into doing a deal.  "The territories are going fast.  This deal is only good until Friday.  Act now or lose," are sure signs of problems.  Good franchisors want you to make the best possible decision because their long term success depends on your long term success.  Fly by night outfits depend only on your first fees.

5. Talk to and, if at all possible, meet with existing franchisees.  Some shady outfits set up phony references or send you only to their success stories.  Search out other franchisees on your own and get the inside story.

6. Evaluate the training offered by the franchisor against the skills need to run the business.  Make sure that it is adequate.

7. Find out what the real start up costs are.  Get solid estimates on the expenses for building or remodeling a location, legal fees, license fees, carrying costs, franchise fees, and so on.

   Franchising can be a great way to start but you still have to make good business decisions to minimize your risk of failure and maximize your chance of success.

8. Investigate the market and the competition.  Understand what the trends are.  Is this a fad that is going to burn out?  Is there so much competition now or in the near future that this is a bad deal?  Some franchisors will put others so close to you that you can't make any money.

9. Create a real business plan based on the franchise model and get your accountant and banker to go over it with you and look for problems.  Revise your business plan and be sure to include adequate working capital to cover unexpected expenses and the inevitable slow sales during start-up.

10. Line up financing based on your revised business plan.  Recalculate your business plan.

11. Walk away from the deal if it's too risky.

12. Do not be afraid to spend money on investigating and then walking away.  Don't throw good money after bad.  The money you spend to evaluate deals is just an investment you have to make on the way to finding the right opportunity for you.

Read the auction section in the newspaper.  You will get a sense for the types of businesses that are closing in your area.  Some may represent an opportunity for you to do better and others will represent a warning about what’s not working.  New businesses always look easier and more promising until after you own them and the bills keep coming due.