In this two-part series, last month’s issue explored the basics of franchising. Now, an overview of how to begin, from the International Franchise Association.
Franchisors say the benefit of choosing the franchise business model is that you are in business for yourself, but not by yourself. The September issue of North Idaho Business Journal introduced the concept of franchising, advantages and disadvantages, and the franchise agreement — the right to market an existing product or service using a known trademark or name (the “franchisor”).
Once you’ve made the decision to be a franchisee, it’s time to investigate your options. That means asking yourself a lot of questions.
Choosing a business category: They say if you do what you love, you’ll never work a day in your life. To examine that practically, consider what you enjoy doing and what you know how to do — your interests, skills, and experience. Which industry(s) combine those interests, skills, and experience? What products or services could you sell?
Evaluating the market: All successful businesses satisfy a need, solve a problem, or respond to a trend. Before starting any business, determine the potential market for your product or service.
How many potential customers are in your area?
Will your product or service sell — what need, problem, or trend does it address?
What should the appropriate pricing be — what are your customers willing to pay?
Who are your competitors, and what do they offer?
How will your product or service be unique? What marketing niche can you capture?
Affording it: Most businesses which fail do so because they didn’t have enough money to start or keep it going. Whatever you think it’s going to take, double it. Startup costs may include architectural design and construction, professional legal and accounting fees, equipment and fixtures, opening inventory, insurance, pre-opening labor, advertising (very important!), rent, utilities, salaries, and interest on loans.
When it comes to selecting a franchise, many criteria are critical to success. Carefully consider the following:
Costs: How much money will this franchise cost before it becomes profitable? Can you afford to buy it, and will you make enough profit to justify time, resources, and energy spent?
Abilities: Do you have the technical skills and business experience to manage the franchise?
Demand: Is there enough demand in your area for the franchisor’s products or services, and is it likely to grow? Is it year-round, or seasonal? Does it generate repeat business?
Competition and brand: How much competition do you have in your area, including other franchisees? Do they offer similar products and services at the same or lower prices? Is there a specialty or niche you can capture? How reputable and well known is this franchise name? Has it been the subject of complaints (check with your local BBB)?
Support and experience: What kind and how much training and support does the franchisor provide? What do existing franchisees think of this franchisor? Has this franchisor been in business long? What are its expansion or growth plans?
Turning to the franchise agreement, a book could be written on its nuances — far too much to include here. Suffice it to say that not consulting an attorney who specializes in franchises may be a regrettable mistake. Franchise agreements vary a lot, tend to be one-sided in favor of the corporate franchisor, and involve obligations the franchisee must adhere to or, ultimately, face losing the franchise. Key elements include rules about the use of trademarks, logos and names; location (do you have exclusive rights within a certain area?); length of term; franchise fees and other payments, such as mandatory marketing participation; training requirements, which can be ongoing; restrictions on goods and services offered; and many other duties or obligations.
Before you sign anything, ask the franchisor a lot of questions:
What is the success rate of existing franchises?
How do they protect franchisees from poorly performing franchises?
Is there a franchise owners association?
Who owns the trademarks, service marks, etc., and are they federally registered?
Are there any disputes pending or threatened against the trademark?
Has the franchisor complied with FTC and state disclosure laws?
Are any senior management or key personnel leaving the system?
Does this company compete with its franchisees in the marketplace?
Will the franchisor finance any of the costs?
Is the franchisor willing to negotiate the terms of the franchise?
What’s the total investment required to own a franchise, beyond the franchise fee?
What marketing is provided or required, and what are those costs?
Does the franchisor earn income on your sales?
How are the products distributed, and how long for orders to be filled? Is there a required minimum?
What training is provided, to whom, and are their curricula you can see?
What other initial or continuing services does the franchisor provide or require, and what do they cost?
Is there a guarantee or warranty program?
Believe it or not, there is even more to consider depending upon the particular franchise, product, and business.
The Federal Trade Commission offers a free publication, “Consumer Guide to Buying a Franchise,” 202-326-2222. For more information see Franchise.org.
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Sholeh Patrick is a Hagadone News Network columnist. Email: email@example.com