Once you have decided to invest in a franchise, step back from the excitement of going into business for yourself and make sure the franchise of your dreams is all it promises to be.
You may have been working with a franchise broker or a franchise salesperson employed by the franchisor. Each has a vested interest in getting you to sign the franchise contract. Before you sign any agreement, make certain you have asked the right question and gotten the information you need to make an intelligent decision.
But where should you start?
The Web is a logical place to begin your due diligence. Examine every news article you can find about the franchisor, its management team, and the industry. Even the weakest franchise becomes a player if they have the right management — and the reverse is also true.
Make certain that you understand the industry. Look for any technological changes that will reduce the customer’s need for the product or service. Remember when you got a tune-up every 15,000 miles? Now that tune-ups come every 100,000 miles, tune-up franchises have either added new products and services or gone out of business.
Look for challenges to the distribution strategy. Remember when there was a frozen yogurt store on almost every corner? At one time there were more than 40 franchisors of frozen yogurt. Then every ice cream chain and grocer started to sell frozen yogurt, and the market collapsed. Can smoothies be far behind?
Once you have satisfied yourself on the industry, start to look at the competition — and not just the franchised competition. See who the players are and try to determine their strategies and what trends those strategies can tell you about where the market is going.
Finally, if you are still fixed on a franchise in that industry, take a look at the information on each franchisor’s Web site. Select a few of the stronger competitors for further examination. The obvious choices may be the well-established companies with hundreds of franchisees. But newer companies may have new, innovative technologies that will give them an edge over their established rivals.
Try to understand the philosophy of each company, and compare their services and their fees with others in the same industry group. The fee amount should be the least important factor in your decision on which franchisor to partner with. If the fees are high but the services provided by the franchisor are the best available, the high fees are a bargain. If the fees are low and the services are inconsistent or leave you on your own, why buy the franchise in the first place?
When you have compiled your short list of finalists, meet with those franchisors at their headquarters. Taking time off and flying to meet with a franchisor can be time-consuming and expensive, so you will need to be selective.
Allow each franchisor the opportunity to introduce you to the system, the services, and the key personnel. The franchisor will be examining you to determine if you fit their system, but this is also your opportunity to examine them to see if you want to join.
Come prepared with questions, and don’t be embarrassed to ask them. Probe for the information you need. Investing in a franchise is likely going to be the most important personal business decisions you will ever make. You need to be certain you are making the right choice.
The Franchise Disclosure Document, or FDD, will provide you with a wealth of information on the franchisor and its system. Read the disclosure document carefully and hire an experienced franchise lawyer and accountant to help you understand the terms of the agreement.
The final source of information is current and former franchisees. A listing of current and former franchisees, including their contact information, is included in the FDD. Call and visit as many franchisees as necessary for you to make an educated decision. Be respectful of their time, but ask them questions concerning the support they get and the relationship they have with the franchisor. Talk to them about how long it took for them to break even and whether the investment information contained in the FDD, including working capital, was accurate. Finally, ask them if they would invest in a franchise today based on the information they have about the system. That is the most important question of all.
In making your franchise decision, suppress your emotions. Never buy a franchise based upon sizzle or salesmanship. You need to base your decision on the quality of the investment. You need to be certain that the franchise you choose will fit you personally and benefit you financially.
Click here to view a sample Due Diligence Checklist. By reviewing and preparing the documents on this list, you can help expedite closing a deal.