Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (11 page)
Does the company still sound good? That means your investigation is just beginning. If you have not already received one, contact the franchisor again and ask for a copy of its Franchise Disclosure Document, or FDD (previously known as a Uniform Franchise Offering Circular, or UFOC). This disclosure document must, by law, be given to all prospective franchisees 10 business days before any agreement is signed. If changes are made to the FDD, an additional five days are added to the 10-day “cooling off” period. If a company says it is a franchise but will not give you an FDD, then contact the FTC—and take your business elsewhere.
The FDD is a treasure trove of information for those who are serious about franchising. It contains an extensive written description of the company, the investment amount and fees required, any litigation and/or bankruptcy history of the franchisor and its officers, the trademark you will be licensed to use, the products you are required to purchase, the advertising program, and the contractual obligations of both franchisor and franchisee. It specifies how much working capital is required, equipment needs and ongoing royalties. It also contains a sample copy of the franchise agreement you will be asked to sign should you buy into the system, as well as three years’ worth of the franchisor’s audited financial statements.
The FDD has been revamped to make it less “legalistic” and more readable, so there is no excuse for failing to read yours very carefully. Before you make any decisions about purchasing the franchise, your attorney and accountant should read it as well.
WARNINGExaggerated profit claims are common in franchise and business opportunity sales. Is a company promising you will make $10,000 a month in your spare time? If it is a franchise, any statement about earnings (regarding others in the system or your potential earnings) must appear in the Franchise Disclosure Document (FDD). Read the FDD and talk to five franchise owners who have attained the earnings claimed.
Franchise Evaluation WorksheetThis will help you determine the attractiveness of each franchise you’re considering. Assign each franchise a column letter. Answer each question along the left-hand side by assigning a rating of 1 to 3, with 3 being the strongest. Total each column after you’ve finished. The franchise with the highest score is the most attractive.
IT’S SHOW TIMEF
ranchise and business opportunity trade shows can be a great opportunity to explore business investment packages. Attending one is exciting—and overwhelming—so you need to prepare carefully.Before the show:•
Consider what you are seeking from a business investment
. Part time or full time? What type of business do you think you would enjoy? Consider your hobbies and passions.•
Figure out your financial resources
. What is liquid, what can you borrow from family and friends, and how much do you need to live on while initially running the business? What are your financial goals for the business?•
Get serious
. Dress conservatively, carry a briefcase, leave the kids at home, and take business cards if you have them. Show the representatives you meet that you are a serious prospect.At the show:•
Take a moment to study the floor plan of the exhibitors listed
. Circle the businesses you recognize or that look interesting. Make sure you stop by these booths during your visit.•
Don’t waste time
. Pass by the sellers who are out of your price range or do not meet your personal goals. Have a short list of questions ready to ask the others:1. What is the total investment?2. Tell me about a franchisee’s typical day.3. What arrangements are made for product supply?4. Is financing available from the franchisor?5. Ask for a copy of the company’s FDD. Not all franchisors will give you one at the show. This is acceptable, but if you are serious about an opportunity, insist on a copy as soon as possible.•
Collect handout information and business cards from the companies that interest you
.After the show:•
Organize the materials you collected into file folders
. Then read through the information more closely.•
Follow up
. Call the representatives you met to show them you are interested.
One of the most important parts of the FDD is a listing of existing franchisees as well as franchisees who’ve been terminated or have chosen not to renew. Both lists will include addresses and phone numbers. If the list of terminated franchisees seems unusually long, it could be an indication that there’s some trouble with the franchisor. Call the former franchisees, and ask them why the agreement was terminated, whether the franchisee wasn’t making the grade, or whether he or she had some type of grievance with the franchisor.
Next, choose a random sample of current franchisees to interview in person. This is perhaps the most important step in your research. Don’t rely on a few carefully selected names the franchisor gives you; pick your own candidates to talk to.
Visit current franchisees at their locations. Talking to existing franchisees is often the best way to find out how much money individual stores actually make. You’ll also find out what their typical day is like, whether they enjoy what they do and whether the business is challenging enough. Most will be open about revealing their earnings and their satisfaction with the franchisor; however, the key to getting all the information you need before buying is asking the right questions. Here are some ideas to help get you started:
• Was the training the franchisor offered helpful in getting the business off the ground?
• Is the franchisor responsive to your needs?
• Tell me about a typical day for you.
• Have there been problems you did not anticipate?
• Has your experience proved that the investment and cost information in the FDD were realistic?
• Is the business seasonal? If so, what do you do to make ends meet in the off-season?
• Have sales and profits met your expectations? Tell me about the numbers in the business.
• Are there expansion opportunities for additional franchise ownership in this system?
• If you knew what you know now, would you make this investment again?
Since running a franchise involves an ongoing relationship with the franchisor, be sure to get the details on the purchasing process—everything that happened from the day the franchisee signed the agreement to the end of the first year in business. Did the parent company follow through on its promises?
“Starting a company is
the best stage of a
startup. There’s the
creative aspect. You also
have to articulate your
idea. There are a million
things going on.”-KATRINA GARNETT,
FOUNDER OF CROSSROADS
SOFTWARE
Talk to as many franchisees as you can—a broader perspective will give you a more accurate picture of the company. Take careful notes of the conversations so you can refer to them later. Don’t hesitate to ask about sensitive topics. One of the most important questions a prospective franchisee should ask, but rarely does, is “What conflicts do you have with the franchisor?” Even established, successful companies have conflicts. What you need to find out is how widespread and common those conflicts are.
Talking to franchisees can also give you something you won’t get anywhere else: a feeling for what it’s like to run this business day to day. Thinking solely in economic terms is a mistake if you end up with a franchise that doesn’t suit your lifestyle or self-image. When you envision running a restaurant franchise, for instance, you may be thinking of all the money you’re going to make. Talking to franchisees can bring you back to reality—which is a lot more likely to involve manning a fry station, disciplining employees and working late than cruising around in your Ferrari. Talking to franchisees in a variety of industries can help you make a choice that fits your lifestyle.
WARNINGIf your visits with current franchisees result in each one telling you they are unhappy or would not make the investment in this franchise again, think long and hard about your own decision. If they feel the franchisor has let them down or has a flawed program, you should look more carefully before taking the plunge.
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