10 Steps to Buying the Right Franchise
Recession, unemployment, tight credit, crashing stock market–we’re in hard times and it’s going to continue for a while. In spite of this, or maybe because of it, franchising is booming, with hundreds of thousands of people looking into franchise opportunities every day.
Business ownership is the American Dream. Franchising remains one of the safest ways of becoming a business owner due to the time-tested training and support available from top franchises in more than 80 industry categories–a number than continues to grow.
If you want to be your own boss, make sure you’re finding the best franchise for you, which may be different than what you thought given the market conditions. Following are 10 steps to selecting a great franchise in the down market conditions expected for 2009.
Ask yourself what you really want to achieve by owning a business. Things like, what hours you want to work, what kinds of things are you good at and like to do, how much money can you afford to invest and what returns will you need to produce from the business? Also, give some thought to where you want to live and operate your business, as well as what your exit plans are in the future. Once you understand what’s important to you, you’ll be able to evaluate any franchise opportunity and know if it’s a good match.
These are not normal times. Given what’s happened to our capital markets, you’ll need to have a clear idea of how much money will be available to you. Unless you’re sitting on a mountain of cash, start this process early on because the answers can be quite different from what they were just a few months ago. For more on funding, review my previous article, ” 3 Sources of Franchise Financing .”
Step 3–Evaluate industry categories
Take a master list of franchise opportunities (the Entrepreneur Franchise 500 published each January is the most comprehensive) and review it. Don’t bother with individual companies at this time, just focus on industry groups or categories. Based on your impression of each of these segments, ask yourself if it appears to meet the desired criteria you identified in Step 1. If it doesn’t, cross it off. You’ll end up with a list of possible industry segments.
Step 4–Look for recession-resistant segments
Take your list of possible industry segments and ask yourself a simple question: “Do I believe this is a business that will continue to do well regardless of the state of the economy?” This will be true of businesses like damage restoration, fast food, senior care or hair cutting, but it may not be true of others like optional expensive services businesses or upscale retail. Cross off industry segments if you believe that they’re not recession resistant so you give yourself the best possible chance for a successful decision.
Step 5–Start identifying individual franchise companies
Once you’ve narrowed down the list, look at individual companies and pick one that you think is representative of the category. Try to select companies that will have territories available in your desired area. From this list of companies, pick a few that seem most interesting or attractive to you based on your criteria identified in Step 1. It’s time to look at them in a little more detail.
Step 6–Request preliminary information from franchisors
After selecting a few companies that match with you, contact the companies and request basic franchise information. This might be on a website or in brochures, videos or other materials they may send you after you visit with one of their development staff. Review the preliminary information from each company to determine if, based on this further information, the company still appears to meet your criteria and is worth spending more time on. From this point forward, your time commitment on each active investigation is going to increase dramatically, so be selective.
Step 7–Study the FDD
After your initial contacts and the submission of a qualification questionnaire, the franchisor will typically provide you with its Franchisor Disclosure Document (FDD), an FTC-mandated disclosure document. The FDD contains extensive information about the franchise, including the history of the executives, any litigation the company has experienced, the names and contact information for the current franchisees, and a copy of the franchise contract. Review this information carefully and get any questions you have answered before you proceed to the next step.
Step 8–Call existing franchisees
The best source of information for any franchise system is the existing franchisees. Contact franchisees and ask them all about the business, their lives as franchisees, and what they think of the company. This is a good tool for evaluating how well a franchisor supports its franchisees, whether the startup cost projections are realistic and how effective the provided marketing materials are.
Step 9—Visit the franchisor
Assuming everything else checks out, your second-to-last step is usually a visit to franchisor headquarters. This is a great time to get any final questions answered and to meet the people who will be helping you get your business up and running. Though this may seem like a formality, it’s a vital check-and-balance to make sure you are completely comfortable and confident in the company you are about to enter into business with. Also, keep in mind that they will be carefully evaluating you as a potential franchisee at the same time, so this final judgment is a two-way street.
Step 10–Make your decision
Once you’ve completed the preceding nine steps, it’s time to make your final decision. If you’ve carefully followed this process, you can be sure that you’ve made your choice for all of the right reasons, that this franchise opportunity does all of the following:
- Matches your financial resources
- Provides you with the lifestyle you imagined
- Uses your particular skills and experience
- Provides a recession-resistant product or service
- Has a majority of happy and successful franchisees
- Employs an experienced and enthusiastic staff of personnel who will help you achieve your dreams of business ownership success