Top 10 Things to Consider for Prospective Franchisees

This article first appeared in the February 2008 issue of Opportunity World magazine (www.opportunityworld.com) and is republished on this website with the permission of Business Leader Media, owner of that magazine.  Its contents are not to be redistributed by viewers or used for commercial purposes.

Top 10 Things to Consider for Prospective Franchisees
By: David L. Cahn and Jeffrey S. Fabian

For many people considering purchasing a franchise, simply not knowing what questions to ask poses a significant barrier to entry. While some entrepreneurs may have an eye on a particular industry or franchise, others may only know that they want to go into business “for themselves, but not by themselves.” In either situation, the process of evaluating a franchise opportunity should be the same. What follows are questions that all prospective franchisees need to consider.

1.   Are you really ready to own your own business?

Many prospective franchisees get caught up in the dream of owing their own business or in the hype of a franchisor, and they may rush into an opportunity without truly evaluating their capabilities and the long-term consequences of entering into a franchise relationship. You should ask yourself: “Am I prepared to take on the risks and stresses of owning a business?” and, “Am I ready for the long-term time commitment of owning a business?”

2.   Which industry is right for you?

Financial and other considerations aside, this question requires you to consider how your experience and skills can be translated into owning your own business. Experience within a particular industry may cause your interests to align with a particular franchise or group of franchises, or possibly enhance your potential for success.  Likewise, you should consider your personality and temperament in choosing a franchise.

3.   How are you going to fund the initial investment (and your family and lifestyle)?

Equally important with finding the franchise that is right for you on a basic level is making sure that you have the funds necessary to finance its operation and to support you and your family through the initial stages of operations.  There are a variety of loan offerings available for small business owners, and some franchisors offer financing of the initial franchise fee. You should investigate all of your financing options and choose the one that makes the most sense for you.

4.   Have you performed your due diligence before committing to a particular franchise?

The next step is to perform your due diligence and fully investigate the franchise opportunity or opportunities you are considering. In addition to researching an opportunity of primary interest to you, this also involves investigating competitive opportunities to make sure that the one you choose is the best fit for you. You should carefully read the franchisor’s Franchise Disclosure Document (“FDD”), and you should prepare questions and speak with the franchisor regarding any issues or concerns you may have. You also should speak with and visit with numerous current and former franchisees. You also should research the franchisor’s track record, both as far as providing support to franchisees and as far as its reputation within its industry.

5.   How likely are you to benefit from being associated with the franchisor’s brand name?

Just because you have a strong interest in a particular field or product and fall in love with a franchisor’s system and business methods does not mean that the general public will do the same. While joining a regional, national or international franchise system typically will have immediate name-recognition benefits, this may not be the case with a newer or smaller franchisor. If the franchisor’s name has little or no value, you should consider whether their franchise is worth the investment.

6.   Is this something you will want to be doing many years from now?

Franchise agreements are long-term, binding commitments with ongoing obligations and performance standards.  Will you be willing and able to comply with these restrictions throughout the term of the agreement?  You can only transfer franchise rights with the franchisor’s consent.  Moreover, if the franchise if failing or if you have not put in the effort to build up its value, you may very well end up taking a loss when and if you find a buyer, or simply having to shut down operations.

7.   Can your geographic location support the volume necessary to sustain your franchise?

Some franchises will do better in certain locations than others. An IT or paper shredding franchise is not likely to do as well in a rural area as it would in a metropolitan area. An ice cream franchise probably will do better in warmer climates than cooler ones. You should spend a good deal of time investigating local markets as well as specific locations for the franchise. If the market is good, but the population is spread over a wide area, consider negotiating for a larger protected territory.

8.   Is the industry you are considering a sustainable one or a trend?

While there are arguments for purchasing a “hot” franchise, it is important to consider whether a market will exist for your products or services throughout the term of your franchise agreement. How many products have been touted as the best thing since sliced bread only to get lost in the shuffle a year later? It is not enough for you and your franchisor to be committed to your success—what you are selling must have customer appeal over the long term.

9.   Who are the competitors; where are they; and how will you compete with them?

Franchisees must find a franchisor and a product they trust and believe in, and that they believe to be sustainable. Franchisees must then select a territory and location that will maximize their chances for success. All new franchisees should formulate a business plan and marketing program attuned to their specific industry and location. Before purchasing a franchise, consider what makes the product or service your franchisor offers stand out from its competition’s.

10.  Is this franchised business likely to satisfy your income goals?

Determining how well your franchise needs to do for you to make a satisfactory living should be a lengthy process based upon many of the considerations discussed above: How much money do you need to be able to pull from the business? What have other franchisees told you? What information were you able to obtain from the franchisor? What have banks and loan companies said? What have you figured out in your business plan? Analyzing the answers to all of these questions will be critical to determining whether you will be able to succeed as a franchisee.

The decision of whether to purchase a franchise cannot be taken lightly; it should be based on an evaluation of one’s own interests, goals and capabilities, and risk tolerance, thorough research of the available franchise opportunities, and the advice of qualified professional advisors. By conducting a proper program of investigation, you can take on a franchise opportunity with confidence and a real chance for success.

David L. Cahn, Esq. is the founder of the Franchise & Business Law Group in Baltimore, Maryland . Jeffrey S. Fabian is a law clerk with the firm. They can be reached at 410-347-9442, or online at www.franbuslaw.com.