Selecting the Best Franchise: Fundamentals

THE AMERICAN DREAM

Owning a successful franchise can be a major step toward realizing the "American Dream." It can provide a new entrepreneur with a golden opportunity to launch a new venture with high potential and reduced risk. In the bargain, he can acquire a rapid startup for a business that has already achieved name recognition. The extensive support and training available from a large successful franchiser will produce a precise business plan, including proven techniques and procedures, designed to put the enterprise on a fast track to success. There are always risks, however, and there are no guaranties against failure. To keep this shot at the "American Dream" from turning into a nightmare, it will be extremely important to apply due diligence and careful investigation before selecting the franchise that will work best.

THE PROS AND CONS OF FRANCHISE OWNERSHIP

The new owner normally gets to use the name and the logos of a large successful firm for some specified period of time. Also, assistance is provided for selecting the business location, training personnel, and preparing operating manuals. Management support is included for establishing marketing goals, determining operating costs, maintaining financial ratios, and for selecting and training personnel. Although the contract with the franchiser usually permits the investor to own and operate the business, it may also require him to surrender a lot of operational control and, further, to assume various obligations as well. All of which is intended to reduce the business risks by forging a close association with the company.

FRANCHISE COSTS

Franchise fees vary from company to company and, typically, they are not refundable. Expect to pay dearly for the privilege of using the business model, assistance, and guidance provided by the company. In addition, anticipate significant expenditures for rent, equipment, inventory, insurance, licenses, permits, and even some charges from the company for promoting and participating in the grand opening. Royalty payments to the company may be calculated based upon a percentage of income or payable according to some other schedule. These royalties may prevail for the life of the franchise agreement even if the company fails to deliver the promised support services. The company may ask for advertising fees even if they are not spent for the promotion of your particular operation.

ELEMENTS OF CONTROL

It is common for franchisers to maintain strict control over the daily operation of the business to ensure uniformity across all franchises. As a result, the franchise owner may have little to say about matters like site location, quality and service standards, regular maintenance and repairs, and seasonal alterations, all of which may be at his own expense. There may be no control over changing the mix of products and services being offered, where they may be acquired, or how they may be sold. There may also be constraints on the methods and procedures used, as well as restrictions limiting the owner’s decisions about work hours, dress codes, advertising, accounting methods, supplies and suppliers. Limits on sales area may be imposed to reduce competition with other company franchises while inhibiting future re-location and impeding attempts to expand the customer base.

TERMINATION, EXPIRATION, AND RENEWAL

The franchise contract may include provisions for costly remedies and even termination in the event of a breach by the franchisee. It could incorporate conditions affecting dissolution of the relationship at the end of the franchise life, or clauses dealing with possible renewal of the venture in the future. For example, an owner might loose his entire capital investment for failing to pay royalties, or for not adhering to performance standards, or for not complying with other sales restrictions. Such failures to uphold the terms of the franchise agreement could be very, very expensive. The franchiser may reserve the right not to renew at the end of the contract or to revise major provisions before agreeing to continue. Royalties and fees may be increased, new standards and restrictions introduced, or the sales area revised.

BEFORE SELECTING A FRANCHISE

The risks, responsibilities, cost, control issues, and contract obligations are the preliminary considerations to determine the potential of a franchise. Having a clear understanding of the benefits and the pitfalls of franchise ownership is an important first step toward the preparations required prior to actually selecting a good franchise. There will be much more about this in the next installment.