Is a Franchise Right for You?

by Mark C. Siebert

Prospective franchise owners always want to know, "What is the best franchise to buy?" It's a simple enough question, but there's no simple answer.

If a prospective franchise buyer has narrowed their list of potential franchises, they can begin assessing risk versus return and evaluating the value proposition. But for someone who has not wandered very far down the franchise-buying path, the short answer is: Which franchise you buy depends almost entirely on you.

Potential franchisees first need to look inward. With that advice in mind, here are the "top ten" questions every future franchisee needs to ask themselves before buying.

1. Am I ready to clean the toilets?

Being in business for yourself is not as glamorous as some might have you believe. If you are a corporate refugee (or planning to become one), it's important to realize that small business works differently than the world to which you may have grown accustomed. You will find yourself wearing many different hats—some of which you may not enjoy. And if that means cleaning the toilets when you're the only one there to get the job done, then clean you must.

At the very least, when you first start in business, you can forget about weekends and vacations. You are building a business, so you will have limited "me time" and can count on a few sleepless nights while you wonder if you made the right decision or where the next payroll will come from.

2. Am I a cowboy?

Entrepreneurs make the world go round, but too much entrepreneurial thinking in a franchise system is a recipe for disaster. Some entrepreneurs are people who never saw a rule that they didn't want to break. But in franchising, that attitude will likely cost you your franchise. The best franchisors have systems they enforce rigorously, and if you cannot live within those systems, franchise ownership is not for you. Before you buy a franchise, ask yourself if you can follow the franchisor's systems, or if you will feel compelled to tweak the systems or innovate.

3. Do I have the financial resources I'll need?

Although franchising can significantly reduce your costs by eliminating many of the costly mistakes that the unguided entrepreneur might otherwise make, it is not a no-cost means of going into business. The franchisee is expected to pay a franchise fee and bear significant additional costs of starting the business. For most retail businesses, the price of entry starts at $100,000 and goes up from there. And while some financing may be available, you will certainly need to have substantial resources to get started.

If franchising is the route you choose, the franchisor will be legally required to provide you with a Uniform Franchise Offering Circular (UFOC) early in the sales process. The UFOC is much like a securities disclosure. It contains information provided by the franchisor in 22 prescribed areas, including an estimate of your total start-up investment. When reviewing the UFOC, think through the details and exercise caution. The investment ranges disclosed by franchisors can vary substantially and are generally not subject to any outside scrutiny.

4. Am I ready to go "all-in"?

Just having the capital you'll need is not enough—you have to be willing to spend it, ideally without losing much sleep. For some, a decision that requires us to part with a large portion of our savings can cause sleepless nights. But if savings alone will not do it, you may need to borrow—and that will require a good deal more emotional fortitude.

If you borrow money to get started, you may need to put your house on the line. Add to that the fact that most franchisors will require personal guarantees, and will often ask spouses to sign these guarantees as well. If these commitments are too much for you, consider another business start-up strategy.

5. What is my passion?

Provided you have the financial and emotional wherewithal to buy into a franchise, and are willing to do whatever it takes to build the business, the decision as to which franchise to buy into should start with your passion. Franchising is more than an investment vehicle. For most franchisees, it is a lifelong commitment. As such, start by looking at franchises that will let you do something that you love.

And make sure you are answering with a dispassionate heart. A business that may be alluring on the surface may be less attractive once you have gotten past the surface and into day-to-day operations. Make a list of exactly what you will be doing day-in and day-out. Will you enjoy doing those things? Is that where your passion lies?

6. What are my skill sets?

Deciding on a franchise also requires honest self-assessment. All of us have different skill sets. The important question for prospective franchisees is how well those skill sets match up with the franchise in question. Keep in mind that some skills are trainable and others are not. If a particular franchise requires sales skills you do not have, no amount of training provided by the franchisor will ever make you a great salesperson. Take a hard look at the skills that make the best franchisees in the business you're investigating. Do you have those skills? If not, are they trainable skills, or should you look for another franchise that taps into your current skill set?

7. What are the larger market forces in play?

Once you have narrowed down your list of franchises to those that would be a good fit for you, you need to get out your crystal ball to see if you can determine if the franchises you are examining are well positioned to take advantage of the trends in the marketplace. That means more than just assessing where the franchise is currently. It means trying to understand the factors driving a particular market and determining that market's direction in the future.

Ask yourself if the business is adequately differentiated from its competitors, and whether it has a sustainable competitive advantage. Has the franchisor established a brand in the consumer's mind? Is the product offering itself sustainable, or is it a response to the latest trend? And, last but certainly not least, if the market is growing rapidly, are there any 800-pound gorillas out there who might just enter the market to take advantage of that growth?

8. Can I quantify risk versus reward?

As you continue to look at franchises, your next job is to quantify risk versus reward as best you can. Although there are no simple ways of doing this, the UFOC is a good place to start. Some measures of risk that you will find in the franchisor's UFOC include:

• Franchise failure rate
• Number of lawsuits
• Length of time in business
• Length of time franchising
• Financial strength of the franchisor

Look closely at these factors then measure your assessment of these risks against your assessment of potential returns. Unfortunately, because of the way in which franchise disclosure laws are written, franchisors that do not choose to publish "earnings claims"—disclosures about sales, earnings or expenses—are prohibited from discussing those topics with potential franchisees. In fact, about 80 percent of franchisors choose not to publish any earnings claims.

That means that you need to do some digging. Probably every article ever written on buying a franchise advises prospects to call as many franchisees as possible; this article will be no different. Calling franchisees is the single most important step in your due-diligence process. Franchisees (as well as some past franchisees) are listed in the franchisor's UFOC. Call them. Visit their franchise locations. Ask a lot of questions.

Not only will these franchisees be able to provide you with information about sales, revenues, expenses and potential profits, but they will also be your best source for understanding the day-to-day operations and their insights will help you assess the franchisor's value proposition.

9. What is the franchisor's value proposition?

Even if the franchise is right for you on many levels, before signing on the dotted line, ask yourself about the franchisor's value proposition. As a franchisee, chances are that you will be paying an initial franchise fee, advertising fees and ongoing royalties that over time will amount to a significant sum of money. In addition, you may be required to buy products from your franchisor on an ongoing basis and may have other fees as well.

Ask yourself: What do I get in return for those fees? Does the franchisor have a strong brand? Below-market purchasing power? Proprietary products? Great marketing and merchandising? Access to prime retail locations? Fantastic training and support? What is the value that you are ultimately paying for?

Current franchisees can help you determine a franchise's value proposition. There are two more sources that should never be overlooked: a good franchise attorney and a good accountant. Spend the money. This is an area in which you do not want to be "penny wise and pound foolish."

10. Do I have the fire in my belly?

When it comes to gut-check time, you have to ask yourself: Do I have the fire in my belly to make a great franchisee? The prospect of being in charge of your own destiny is tremendously exciting. If you are successful in your franchise, the upside is virtually limitless.

But, like anything worth striving for, being a great franchisee requires hard work and dedication. Ultimately, a big part of your success will be about desire—that fire in your belly. So before you make the final leap, look inward one last time, and ask yourself how much you want it.