Some Words about Franchising
Just because someone is starting a franchise that at first glance looks like the next great fast-food concept in your area, don’t automatically jump at the idea. Franchising is just another means of operating a business. Before you invest in a franchise, you have to be sure that some very important characteristics are present.
When you look into the history of a franchise, investigate the uniform franchise agreement that it must file in many of the states. In that filing, you will find the failure rate of the franchisor. If you discover that the number of failures exceeds 3 percent, the franchise that you are about to invest in is above the national average. You may want to read the entire uniform disclosure agreement to learn about the franchisor.
One of the things that you will be looking for when you review the uniform disclosure agreement is the financial statement of the franchisor. If the franchisor is not well financed and is living hand-to-mouth, it is not going to be able to give your franchisee a great deal of help. Study the franchisor as well as you do your franchisee. Unless the franchisor has the wherewithal to give a great deal of assistance to your franchisee, in all probability, the franchisee that you are investing in will fail.
How Does the Franchisor Make Money?
Every franchisor has an orientation in one direction or another toward the franchisee. By this we mean that the franchisor is either trying to make a great deal of money out of the franchising fee or it is content to break even on the franchise fee and make its long-term money on the royalties. It is by far better to select a franchisor that is oriented toward long-term royalty payments than one who is betting on a quick up-front fee from the franchisee. The franchise fee should not exceed the amount of the service that is being given to the franchisee. In good franchisor relationships, the franchisor charges a fee sufficient to cover its expenses for delivering the training and other assistance to the franchisee.
You may want to call a large number of the franchisees of the franchisor in question to see whether they are happy with their relationship with the franchisor. If after a few phone calls you find a group of unhappy franchisees, you may want to invest elsewhere. If the chain of franchisees is unhappy with their franchisor, in all probability, your franchise is not worth what you are being charged.