Questions to Ask Before Considering Franchise Ownership

Recently I took a short business trip which required some air travel. My traveling companion on the way back, not getting my subtle hint of isolation that my Ipod Touch and headphones projected asked me about my trip and then my profession.

What followed was a series of questions that started out in very familiar terms: "You know, I have always wondered about getting into business for myself but I'm not sure I'm qualified or that it's right for me. " What followed was most of the following questions that are commonplace and typical. So, in only a mild order of importance or, more to the point the way they seem to flow, are my twelve or so typical questions people have burning in their bosoms about franchise business ownership.

You will notice that some do not have definitive answers. The reason is the kinds of business, the market segment and the format that franchiser has selected affect many of these conditions. How the franchise companies answers those ubiquitous scenarios however may affect what interests you and it behooves you therefore to get them answered before moving deeply into a full-blown investigation.

Check them out...

What are my capital requirements?

This number is different for every franchise. There are three numbers the franchiser is interested in that relate to you:

A. What is your net worth - a franchise company has to have this information to determine if you can qualify for financing and whether you will be able to acquire a lease on space (perhaps) because every landlord requires you to have a certain net worth.

B. What do you have available in terms of liquid capital? There is a certain amount of money you need for the franchise fee, opening marketing and working capital. It is different for every franchise. There is a minimum number and a typical number that the franchiser will require. You would be wise to add an additional 10-20% on to that number.

C. What was your last full years earnings? This is important because, typically, regardless of what you tell the franchiser, they want to know if their concept can provide you at least the earnings level you are accustomed to earning. If it doesn't then why bother?

Is it necessary to have a good credit rating?

Probably yes. Even though you may be able to convince the franchisor that you have sufficient net worth and working capital, (plus experience, passion and knowledge) to start the business, there will be other related business components that will require a good credit standing. Think about trying to open a bank account, trying to borrow money, signing a property lease, etc.

How much experience in business ownership should I have?

A franchise company that tells you it is not necessary is only giving you a part of the story. It is most likely true that they have successful franchisee's in their system with little or no direct experience. Should you have experience in components of the business that drive its success (marketing, project management, sales, etc.) means you give yourself an opportunity to jump start the business and reduce your capital needs. Some franchises, particularly those with a significant history and hundreds or thousands of units may have created more sophistication and therefore greater skill set requirements.

The business I am interested in is not one where I have direct experience. Is that necessarily a bad thing?

Once again, franchising covers nearly 800 market segments in America. Some of those not only require experience but certifications, special licensing and education. These types are few however and most do not. It is a huge selling point in franchising that you can come from some place completely different and through preparation, training and support be part of a wildly successful franchise format system.

I see there are Franchise Consultants and Brokers who advertise their services. Do I need to use them?

Consultants and Brokers play a very unique and powerful role in the franchise industry. The right consultant that has a stellar reputation brings to the franchise companies the "right" candidate (prospect). The wrong one simply follows the prospects lead and recommends what they seem to have an interest in. Both to be honest still provide value. The exceptional one is a godsend.

The professional broker/consultant can screens candidates for the franchise companies and likewise for their individual candidates; matches up the best to fit the business model. For that they are handsomely compensated by the franchise company. They also coach prospects on the proper do’s and don’ts during the application and approval process and lend a high level of insight into each concept and that concepts process.

Remember, franchise brokers may only represent a select few franchisors and if you are using a service such as Frannet, FranChoice, TES, BAI or Sunbelt, these companies have pre-screened (think of Consumer Reports) the franchises for you. Online web portals, such as Bison and Franchise Gator, can provide an easy way to search for existing franchise opportunities. They will likely have a very large number of listings relative to what a broker will represent. So, do ya feel lucky punk? Well? Do ya?

Are there quality home-based franchises?

Yes. They do represent a smaller number of franchises and because of their low entry level and quick profit development are most likely to be sold out most quickly to the general consumer market.

I am eating through my savings while I am without a job. How soon can I get open if I started today?

Expect the entire process to take anywhere from as little as 45 to 180 days.

Is there more than one form of franchise model?

Yes, typically there are four forms that are recognized:

A) Single Unit franchise offerings

B) Multi-Unit franchise offerings (2-4 usually in contiguous markets)

C) Area Development (5-10 units in a DMA and contiguous market typically)

D) Master Licensing or Regional Development (You own an entire DMA (Population area of 500,000 or more, County, State, Multi-State area) and own the rights to open many units. In most cases you can sell franchises and share in certain franchiser revenue streams. Usually this is a sophisticated partner for the franchise company.

What form of training does the franchise company provide and how long does it take to complete?

It is important to franchise companies to put prepared franchisees into newly opened units. Nothing reduces the value of a brand than a poorly run unit, regardless of how remote or small or insignificant they might seem in the grand scheme of things. The truth is, most do an excellent job of providing proper training. If franchisees prosper, then the franchiser will prosper through the collection of fees. The franchise company have their reputation and name on the line.

What is a “Discovery Day?” Is it also a decision time for the prospect?

A Discovery Day is a day devoted to the franchise candidate (prospect) and, though some companies hold them in the field, it is normally held at the franchisor’s city, their HQ and in and around their area. You will spend time with key executives, operations and support people and trainers. The day is given to learning about systems and how the franchisor provides assistance, training, ongoing support and future services in the cause of your success.

Will I have a protected territory?

This depends on the product, service, the development of that industry segment and franchise company. Protected territory or "designated" territory is one of those things you need to realize is a catch 22 and does not always serve either franchise company or individual but needs to be evaluated based on the industry, and against offerings from competitors.

Will I have to pay royalties? Could there be other fees?

Every franchise collects some ongoing payment for all they have done and will do in the future. Some franchise companies standardize their fees; creating a minimum amount on a regular basis (bi-weekly, monthly, quarterly) and then a capped top-end. Others have a simple percentage of total revenues (Usually less taxes) earned. You don't, as a candidate focus on royalties as good or bad. You develop your fact sheet and determine if earnings after all expenses is viable for the concept or not. Absolutely expect franchise to collect a form of ongoing fees. This is the primary reason they developed their opportunity in the first place.

Note that many low cost opportunities are not really franchises, but they are considered Business Opportunities (BizOps). BizOps are usually less regulated and can have smaller entry fees (this does not mean less expensive however) There are no ongoing royalty fees with a BizOp although licensing may be exclusive to product lines, equipment and services. Many are home based. However, be careful when choosing a BizOp. Make sure that the opportunity is tried and proven.