Before You Buy a Franchise: Part 1

By Cliff Ennico

May 23, 2017 6 min read

If you have downsized from a corporate job or are in your 40s, 50s or 60s and looking for a new career, you may be thinking about buying a franchise.

Franchises give people the opportunity to live an entrepreneurial life with much lower risk than starting a business from scratch. A franchise will assign you an exclusive territory for your business, train you, help you find a location (if necessary — you can operate many franchised businesses from a home office) and support you as you build your business. Other franchisees in your area can offer additional advice and support: You are not competitors and are actually expected to communicate with and support each other. Build a successful franchise in 10 years and you will probably be able to sell it for a substantial profit or pass it on to your children as a family legacy.

Sounds pretty enticing, doesn't it?

While buying a franchise is certainly less risky than, say, starting a technology company, there is no such thing as a totally risk-free entrepreneurial career opportunity.

I review dozens of franchise programs each year for my clients. Here are some of the risks I warn them about and the questions I make them ask the franchise executives and its existing franchisees before they get caught up in the franchise's sales pitch:

Does management know what it's doing? When you buy a franchise, you are buying the management team. Read their resumes in item 2 of the franchise's franchise disclosure document, or FDD, very carefully. If the disclosure in item 2 is sketchy, don't hesitate to ask for more information about the key managers: the people who will train you, help you find your business location and provide you with technical support.

Where do they come from? Do they know the industry? Do they know the market? Do they know franchising? Beware the automotive franchise whose managers came from fast-food franchises.

If it's a fast-food franchise and the director of real estate operations is 23 years old and working this job as their first out of college, do not buy the franchise. Conversely, if the franchise director of social media marketing is in his 50s or 60s, be careful — you want to see a millennial in that position.

If the franchise seems to be heavily dependent upon one or two aging founders, ask if a succession plan is in place should they die or become disabled.

Does the franchise model work everywhere in the U.S.? Many franchises get started in low-cost states in the Midwest or the South. Often, when these franchises expand out to the two coasts, the model falls apart due to the higher costs of living there, higher taxes and other factors.

If a franchise requires you to hire a minimum of 20 employees at $20,000 a year, you do not want to be the New York City or San Francisco franchisee.

Look out also for regional differences. In the South, when your car or pickup truck needs a new transmission, you take it to an independent mechanic. In the Northeast, you take it to the dealership for servicing. A soup restaurant franchise may do well in Michigan but probably won't in Louisiana, especially in July.

Is the franchise business looking backward or forward? Too many franchises crossing my desk are wedded to a brick-and-mortar business model that is rapidly being made obsolete by digital technology.

How is the franchise adapting to a digital world? Is it creating a mobile app on which people can order products or services from their phones? Can you market your franchise on Facebook, Twitter and other social media platforms?

If the franchise requires you to take out a Yellow Pages ad, it is living in the past.

Will the franchise model be viable over the long term? On a related note, be careful about the franchise that seems to have a hot new concept but is really just a fad. Cupcakes, anyone?

Beware the exercise (gym) franchise that is heavily dependent upon one particular exercise program — people get tired of doing the same exercises after a while. A franchise that offers to refill toner cartridges for computer printers will be popular for a while but eventually go out of business once the business world goes paperless. How will an auto repair franchise thrive in an era of driverless cars?

Will the franchise compete with you eventually? In every franchise agreement there is a seemingly harmless clause allowing the franchise to offer its products and services through "alternative means of distribution, including but not limited to the internet" without involving its franchisees.

You want to be sure your franchise does not use this to compete with you. If you will be running an ice cream parlor, does the franchise plan to offer its ice cream products in supermarkets? If you are running an education or training service, does the franchise plan to offer their programs via webinar?

More next week...

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.

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