Entrepreneurship and Franchising: Perfect Together

We have been reading articles about franchisors' desire to select franchisees that are not too entrepreneurial. Recruiting business people, who are interdependent rather than independent. Of course, there is some truth to this notion, but overall, franchising requires that franchisor and franchisee work together as a team. In this context, the concepts of entrepreneurship and franchising complement each other nicely.

The franchisor is expected to provide the proven business model, trademark, marketing image, branding, and systems. The franchisees are expected to provide intimate knowledge of their specific region, strong marketing efforts, and a “follow the rules” mentality. But for most prospective franchisees to take the leap into business ownership, they also need to develop an entrepreneurial spirit.

Consider a prospect in franchise sales. This prospect was well qualified in many ways to take on franchise ownership. There was only one problem: He had a really hard time making the decision about whether to buy into the opportunity.

Let me give you the full detail. He had done a thorough job of due diligence. He had reviewed the company's Franchise Disclosure Document, or FDD, with his attorney and his spouse. He had created a list of questions for franchisees of the system, asked his questions, and received responses.

He had even visited two or three of these franchisees, getting a real-life feel for the workings of the business and the pluses and minuses of the franchise system. Yet he felt unable to come to a decision. What can be said about this situation:

“His due diligence has been superb. He has done everything you can possibly do to get clear on this opportunity. He felt that  there is still one more question that will make this perfectly clear, but there’s no such magic question. Now  it’s time to come to a decision.”

You know, each of us has to have a good bit of entrepreneurial skill in order to move into our own business.

Imagine that you do decide to move forward. As a franchisee, you will be required to make immediate and even long-lasting business decisions with as much confidence as possible. Maybe you’ll be faced with a decision on the type of loan to pursue and its terms — or a decision on whether to lease or buy your space. Or maybe you’ll be asked to make build-out decisions quickly so that you can open your unit in time for peak opportunity. You get the picture.

Owners of both independent and franchised businesses are called upon to make entrepreneurial decisions each and every day. Decision-making is part of the package called business ownership. So put on your entrepreneur’s hat, please, when pursuing the franchise purchase decision. It may be what convinces your franchisor that you are the right one for the system.
Source: www.allbusiness.com

The Do’s and Don’ts of Buying a Franchise

Published in ENTREPRENEUR Magazine, Feb edition, Page 68-69

Entrepreneur + February 2010

Due diligence is important when buying any business. A franchise is certainly no different.

By Rajiv Singh

 

One of the first things to consider before buying a franchise is what you are passionate about. That accomplishes two things: it drives the business, and the love for what one is doing drives the owner. When the business and the owner are operating as one, it is a powerful combination.

The next step is to meet with more than one of the franchi-sees currently operating in the franchise. Look at the location and determine if you like its look and feel. Ask the franchisee if their startup and ongoing training has been sufficient, whether the franchisor aides in advertising and marketing efforts, and how much freedom the franchisee has in selecting advertising, the product line, etc. Also ask how many hours the franchisee spends on their business. Confirm with them what their startup costs were, and how long it took to see returns on their investment.

Another important requirement is to carry out a good amount of research before you start up your business.

Make sure you research the following:

• The market

• The system

• The company

• The competition

• The franchisees

 

What to look for?

 

If you are thinking about investing in a franchise and want to know if the brand you are looking at has a trademark worth paying for, then look at their marketing and growth. Has its recent marketing been effective or ineffective? Is the brand growing or has it reached a plateau? Is it consistently coming out with new products and / or services? Researching your potential brand's history can give you an idea of where it is most likely heading.

 

Key questions to ask before buying a franchise

 

1. Do you know the franchisor?

Carry out all kinds of background research on the franchisor. Going for established brands is always good. Opting for an emerging franchise business for sale is also good, provided you have done sufficient research on the business and the sector it is in.

2. What is the brand recall / equity of the franchise?

Franchises work well when there is brand recall / equity of the franchise. Everyone knows about Subway, McDonald's, etc. If a franchise has little or no name recognition, launching it will almost be identical to launching a brand new business.

3. What is the success rate of the franchisees?

Many franchisors have ways to make the success rates of franchisees look better than they actually are.

4. What will it do to help you market your business? Ask what the brand is going to do to promote the name of the franchise in your area or target market. If you are paying marketing fees as part of ongoing payments, how will this fees benefit you?

5. What exactly are you buying?

What do you actually get from spending money to buy the franchise—name recognition, intellectual property, marketing support, lead generation? Is the concept of the franchise mature enough, so you don't have to constantly innovate the product or service on your own?

6. Are you a good fit?

Know your strengths and weaknesses. A franchisee is often restricted by what's there in the franchise agreement. If you take up a concept in which you have no interest just because it is profitable, it may soon turn into a burden for you—you just might lose all your interest!

7. Do you know the market?

Knowing the present market trends is very important for finding success as a franchisee. Most franchise agreements are for 10 years, so you must choose franchise opportunities that belong to categories that have a promising future. It's always better to go for products / services that will be needed in every kind of market.

 

Do's and Don'ts

 

DO:

1. Investigate franchise opportunities. Be careful: there are thousands of franchise offerings, and not all of them are good opportunities. If possible, work for someone else in the business first.

2. Talk to the present owners of the franchise. Ask them how pleased they are with their decision, how good their business is doing, and whether they met their projections. Inquire if the franchisor is responsive to their needs and whether the training was adequate.

3. Consult any and all the advisors you feel can help you. This includes having your accountant and lawyer review the audited financial statements and legal documents.

4. No question is too trivial. Confirm and challenge the information that is provided to you.

5. Compare other franchise systems in the same field. Look for franchises that are solidly managed, well financed, and are positioned in a growth industry. Investigate any regional franchises that are doing well but have not yet gone national in their distribution.

6. Evaluate yourself. See if franchising is really for you. Appraise your experience, skills and likes to determine if the business you are considering is a good fit. Evaluate yourself in comparison to other franchisees that you meet and talk to.

7. Check the history and experience of the franchisor's officers and managers.

8. Research, research, research. The more you know, the better your decision is likely to be. Only you can determine if owning a particular franchise is right for you. Most likely, your decision will be based on two factors: your investment and risk capabilities.

9. Decide whether you want to be in business full time. Or would you prefer to be in it part time, or perhaps with your family?

10. Look to the seller as the best source of financing when purchasing a business.

11. Consider the economics of the business more than how well or poorly it has been run.

12. Verify receivables (through written verification) from people who owe the business money.

13. Deal only with established franchisors who are well-financed and widely successful.

15. Plan for more expenses and slower profitability than you think you need.

 

DON'TS

1. Don't permit any expert to decide for you whether or not you should buy a business.

2. Don't buy a business or franchise without your lawyer approving all documents.

3. Don't buy a business or franchise without your accountant reviewing the franchisor's records.

4. Don't rely on information or advice from the franchisor or other selling agents.

5. Don't rely on pro-forma financial statements (future predictions).

6. Don't be in a rush. Wait patiently for the big opportunity by looking at lots of them.

7. Don't rely on the seller's evaluation of inventory and other assets.

8. Don't deal with startups or poorly financed / inexperienced franchisors.

9. Don't hesitate to walk away from a deal that isn't a potential home run.

10. Don't overlook comparing what you can do as an individual verses as a franchisee.

11. Don't hurry. Cutting corners on your research can increase your likelihood of failure.

12. Don't overextend yourself or be overly optimistic about your personal finances. Be realistic, and if anything, be conservative.

 

"A franchisee is often restricted by what's there in the franchise agreement."

 

Rajiv Singh is the President & CEO of Team India Managers Limited. He is also the Honorary Vice President of the Franchising Association of India (Member–National Executive Council).