Franchises Advice: Small Business Opportunities

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Streetwise Tips on Franchises

* To franchise or not to franchise
If you don’t have a lot of solid business experience or don’t have experience in the particular field you are planning on entering, you should definitely consider buying a franchise rather than an existing business or starting a business from scratch. True, even a successful franchise typically nets smaller profit margins than other types of businesses because of franchising fees and expenses, but the odds of surviving in business at all are much greater.

If you are entering a field with a very strong consumer name recognition factor, I would urge you even more stridently to consider doing so through a franchise. Whether you have experience in the field—fast foods, automotive, or whatever—without the name recognition advantage, you are going to have to work extremely hard to offset the huge benefits of your franchised competitors.

* Due diligence
Perhaps even more so than buying an existing business, you need to do a lot of homework before you purchase a business. You absolutely must have a lawyer review all documents and consider issues that may not be presented contractually. Find out if the franchisor has a history of dissatisfaction among its franchisees. Have lawsuits been brought by franchisees against the franchisor? Why? Who won? Do exhaustive searches of the business and trade media for articles on the franchise(s).

Don’t take the word of a salesperson for the franchisor when looking for accurate information on the franchise.

Get out and talk with as many current franchisee managers and/or owners as possible.

* Issues to consider
There are many issues to consider before purchasing a franchise. These are just a few.

• Exclusivity. Can another franchise be sold in your area? If so, what is the proximity regulation—two miles? one mile? next door?

• Hidden costs. Has every conceivable or possible cost been disclosed? Will the agreement between yourself and the franchisor protect you from hidden costs? How much will you have to contribute to either local, re-gional, or national advertising budgets?

• Cost calculators. Is the fee schedule subject to revision or escalation under any circumstances?

• Revocation of franchise agreement. Under what conditions could the franchise be revoked? What processes are involved in a revocation? Are any investment costs paid by you reimbursable?

• Cash flow. Carefully plan the cash flow of the business, especially prior to break-even. The franchisor may place restrictions on your business that may restrict your ability to cut costs if you get into a cash-flow bind.

* Competing franchisors
There will most likely be several franchisors to choose from in your field. If you don’t have a lot of experience in the industry, buy into one of the more recognizable or established franchises (despite the greater cost). But do comparison shop and research your particular market area before you decide. This is, after all, a major purchase!

* Source Streetwise Small Business Start-Up

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