How Should You Evaluate
a Franchise Opportunity?

To improve your probability of success, you must take the time to evaluate yourself, your strengths and weaknesses, and, most importantly, the franchisor and the industry in which it operates.

The "fit" is critical. Square pegs in round holes are seldom highly successful--and often fail. Continue to study and learn but gain the strength to be decisive. Don't let a great opportunity pass you by because of fear or indecision.

CHOOSING YOUR FRANCHISE

There are four main ingredients found in each business...

1. The product or service that is delivered to its customers.
2. The location that the business occupies.
3. The amount of capital that was invested or borrowed by the venture.
4. The management team that runs the company--You!

A QUALITY FRANCHISE PROVIDES HELP IN ALL FOUR AREAS

1. The franchisor has proven the need for the product or service. The existing units are already addressing that need. The franchisor has developed a specific business plan showing how to market to its customer base, how to price, sell and deliver the product or service too! There will be training on hiring and training employees to help run the company; guidance on pay schedules and benefits; and details (often computer software) to help manage your money.
   
2. The franchisor helps with professional site selection. This is critical for site-specific businesses as is the demographic survey that confirms that your territory contains enough target customers.
   
3. The franchisor provides budgets that work & cost-control systems. You will know when you begin, if you have enough money to get started. Buying power will keep costs down and following the prepared plan will help you reach profitability in short order.
   
4. The home office's training and on-going assistance keeps you on track, working the system that increases your probability of success.

Always remember your franchisor has helped many others succeed in this industry. You've paid them for their expertise and advice---now Follow It!!

MAKING A CHOICE

Choosing the right franchise can be a confusing process.
First, you must believe in the product or service that the franchise network delivers. Is the niche stable, expanding, long-term, saturated??

Next you must verify the industry's future. What do the trade papers predict?
Check your aptitude for the job. If you don't enjoy math, an accounting franchise isn't for you, etc. Often outside sources can help here. A personality and aptitude test (similar to those used by major corporations) will help you discover your hidden talents.

Determine the earnings capability. Most franchisors can't provide earnings projections, but you must make an effort to determine your future return.
Confirm the potential earnings and the franchisor's integrity with existing franchisees. Each franchisor will give you a list of its network members.

You should call them to get their confirmation of your projections. If a franchisor (or business opportunity seller) will not give you a list of its franchisees, you should heed the red flashing lights and end discussions.

LOOKING FOR GOLD

Creating pro-forma income statements is not a complicated process... The formula is basically quite simple: A - B = C
A First you project Gross Sales for the year.

B Then you estimate all Expenses for the same period
A minus B equals Cashflow $$.

This is the pool of funds you'll have to pay yourself, repay debt and invest in expanding your venture.
To develop your Income Statements, first project gross sales. What is the average sale? How many units will you sell per hour, per week, per year?

Use these to establish Annual Gross Sales.
Determine cost of Goods Sold. What is your cost for the materials sold?

Often this can be determined by an industry average. Gross Profit is the difference between Sales and Cost of Goods Sold.
Next you must subtract each expense category: Employees' Payroll & Taxes; Rent; Utilities; Advertising; Insurance; Royalties; Supplies; Accounting & Legal Fees; Repairs & Maintenance; Equipment Replacement Fund; and any Miscellaneous Expenses. Note, this is before your salary and any perks you give yourself, such as a company car, etc.

The balance is Net Cashflow. Again, this should be compared to your gross salary on your current job.

THE FRANCHISE BUYING PROCESS

Research the industry, review the franchisor's brochures and evaluate your interest in participating in the industry. Determine what will be your personal job description. Are you sure you're suited to that type of work, 40, 50 or 60 hours per week?
Submit an application, or Qualification Sheet. Most franchisors want to understand your interests better before they advance much further. While this doesn't bind either party, it will prove your desire to be evaluated for franchise ownership.
Review disclosure documents. The government asks each franchisor to prepare these documents (usually 50+ pages) so that you can get a complete understanding of the offering.
Develop questions for the franchisor. The marketing representative will be happy to share additional information with you to help you reach the right decision.
Call or visit existing franchisees. These owners were on the same path you're now walking a year or two ago. Most will be very helpful in discussing the viability of their industry and the franchisor. See the list of questions in the next section. Note that they start with generalities and become more specific after you develop rapport.
Meet the franchisor. Most feel best with a face to face meeting with the decision makers of the franchisor. Evaluate their sincerity. You're not going to marry them--but it is mighty close. Ask them pointed questions about franchisees that failed. Could you join that group? Does the management team respect all the members of the network--or just the superstars? Choose a potential site. You may want to explore sites that seem suitable for your venture, understanding that most franchisors will have the right to OK or disapprove your choice before a lease is signed. If site is critical to your success, be sure to obtain demographic studies and compare these with outstanding existing franchisees.
Execute the franchise agreement. Two weeks must elapse between the date you receive your disclosure documents and signing the Franchise License. Don't let anyone rush you--but begin making critical decisions in a timely manner--a critical skill for an entrepreneur.
Attend training. The franchisor's school will be your next step in joining the network. Go rested, with an open mind. Absorb and make the commitment to follow their plan--You paid for it, now, use it!
Grand opening When you return home, you'll be set to equip your operation, hire and train your staff and open for business. At this point your future is growing brighter because the person with the most to gain--you--is finally in charge of your success!!

ADDITIONAL THOUGHTS

Here are some additional thoughts added as reference topics to help you be prepared in evaluating different franchising organizations.

Advisors. Talking with others as you decide which franchise is right for you is of great value. Recognize that many friends and family members will discourage you from moving toward your goals. They may sincerely believe they are protecting you from the chance of failure. Sometimes they're afraid you'll outshine them!! Your best advisors are those who have taken a small business risk and achieved the success you desire.

Franchisees are one of the best groups since they've got the "insider's view" you need. Be sure to listen for warning signals. If many are willing to sell, especially for low prices, there may be problems afoot.

Accountants can help you with the financial aspects of the business. The one you choose must be a small business specialist, with franchisees for clients. Remember most accountants are very conservative and they may not understand your strong desire to take control of your financial future.

Attorneys can provide advice on the contracts you'll sign. Again they should have experience dealing with franchisors to understand your needs. Many "generalists" will try to negotiate a better deal for their client by rewriting the contract. This will not be possible. At best, it will slow your purchase, at worst, it will alienate the franchisor to the point they will not allow you to join.

You must understand that the contract is written very one-sided in the franchisor's favor. It contains many prohibitions and stiff penalties to remedy your breach. You should realize that the strength in franchising is that each unit produces the same products or services. If you're the kind who loves to experiment, reinvent the wheel, and "push the envelope," maybe franchising is not for you. You must recognize that standardization is critical.

To your benefit, if your neighboring franchisee decides to modify the list of products or services, you can ask the franchisor to enforce his contract to protect the value you're building in your unit.

FRANCHISEE QUESTIONS

To help you approach franchisees in the network you're hoping to join, we've prepared several "starter" questions.

How long have you owned your unit?
What did you do before?
What activities consume your normal day?
Do sales & profits compare favorably with your expectations?
Do you earn more now than on your last job?
How effective is the franchisor's training? Start-up assistance? On-going help?
Would you consider selling? For how much?
What would you change about the franchisor if you had the power?
Are you planning to open more units? If not, why? Are others?
What recommendations can you give me as I try to decide if this franchise is right for me?
I'm projecting first year sales at $XX. Am I high, low, OK?
I'm projecting Cost of Goods at XX%. Is that High, Low, OK?
Employee Payroll is estimated at XX%, etc.
Repeat for any major expenses you feel you need to verify.
Then repeat with second year sales projections, etc.
Would you buy your franchise again, if you had it to do over??

THE UNIFORM FRANCHISE OFFERING CIRCULAR

The franchise disclosure document is usually a thick, 50+ page document that seems imposing. It contains a great amount of information about the company allowing you to become familiar with the details of your future relationship. This document answers many questions. Who is the Franchisor? Lists the principals of the company and their business background as well as the history of the venture. What is the Offering? Exactly what is being offered? This section describes the length of the agreement, territory, responsibilities, opportunities, etc. How Much Will it Cost? Initial fees, royalties, advertising fees, start-up costs for equipment, and working capital are covered. What Does the Company Promise? Will they train? Develop training materials, ad programs, generate accounts??? What do you promise? Most franchisors will restrict your activities to prevent you from using their system without paying royalties, during and after the agreement ends. Financial History of the Franchisor. Is the company stable? Will they be in business for the long-term? List of Existing Franchisees These are the franchisees you'll want to call to verify that this is a venture you'd like to pursue. A Copy of the License Agreement This is the actual contract that will govern your relationship over the next 5, 10 or 20 years. Read it & understand. Overall, the documentation seems restrictive and somewhat negative. There are more "you can't's" than "you cans". The penalties for violating the agreement are harsh but don't be put off by the legal aspects of the contract. It is written to give the franchisor the power to keep a "wild" franchisee from ruining the good reputation of the entire network. That franchisee will be terminated if they operate a renegade operation. Unless you plan to break the rules, this is only good for you. Your net worth will rise as the value of your franchise goes up. If the company gets a black eye, it will adversely affect you, too. Understand the extent of your restricted or exclusive territory and verify that it makes sense to you and your advisors. Also be sure you compare your favorite franchisor with others in the same industry. Are you getting the most you can hope for at the least cost?? What are the comparative advantages??

Completing your research brings you to the most critical moment of all--making a decision. Evaluate the problem you're trying to solve--low pay, no job, no challenge, lack of control, inability to build your net worth--and look at this franchise as a possible solution. Don't become a dreamer. You must be realistic about the future. Then set a final date (3 to 5 days should be enough) and MAKE A DECISION. If you reject the franchise, begin the process again with another company. Time is fleeting and you must work at solving your problem promptly.