This article are provided for information purposes only, and are not intended as legal advice.


How do you research a good franchise?

December 9th, 2009

Many people want to buy a businesshowever they have never owned a business before and want the comfort of having the ability to rely on someone – the franchisor.  The Franchisor is the one who tells them how to do things, determines the price, determines the layout of the store.  The franchisor has experimented and come up with what they believe to be a successful format to follow.  It is a cookie cutter approach and many people like the comfort of this approach.

 

Not that you have decided you want to buy a franchise, how do you do your research to determine if you found a good franchise.  Go to trade shows and find out what franchises are available.  Once you have narrowed down your search, then go talk to other franchisees, find out about their experience, do they have good training, good support, does the franchisor help them when they have a problem, do they spend the advertising money that they collect in a way that is helpful to you?  Do they help drive traffic to your store?  Are they innovative, do they come up with new products, are the prices competitive to other businesses?  More importantly, are they happy with the franchisor?  Some franchisors are excellent, other franchisors do not care about the franchisee, they are only looking for a franchise fee and a royalty check every month.  Research will tell you if one of the franchises you found falls into this category.

 

Many years ago, a company purchased a master franchise from an existing owner and then tried to collect new franchise fees from all the existing franchisees.  They had no legal position to do this.  One location, the landlord announced that they were refurbishing the area and would eliminate the particular franchise location.  The franchise agreement had expired and the new franchisor wanted the franchisee to pay the full $35,000 franchise fee to renew the franchise  agreement even though they knew that the life of the franchise was only one year and not normally the 10 to 15 years.  The franchise location had revenue of $500,000 per annum and $35,000 was 100% of the profits.  It made no economical business sense to renew the franchise agreement for another year.  So the franchisee did not renew the franchise, the franchisor sold the location to a third party and the new franchisee discovered that he could not make a profit because of the high franchise fees that he paid and folded within a few months.   The franchisor had a $10,000 security deposit in his possession in case of damage to the store.  There was no damage and the franchisor found a new franchise but refused to return the $10,000 security deposit to the original franchisee.  The cost to fight to recover this amount was greater than the $10,000 so the franchisees abandoned the effort to recover what was rightfully theirs.  This is an example of a poor franchisor. 

 

Are there a lot of poor franchisors?  I am sure that there are some, some franchises are in the business of selling franchises and do not care if the franchisee makes money.  Other franchisors bend over backwards to help their franchisees.  Remember, a master franchisor will tell you that on average 10% of the franchisees are poor operators.  As a result, those 10% will probably complain about the franchisor.  During your research, did you talk to one of those 10%?  Make sure that you take to many in case that you only find the disgruntled.  There will always be good and bad franchisees.  Once you have talked to enough franchisees, you will then have to formulate your opinion, do you want to proceed and go to the next step of finding out more about that franchise for sale.


Filed under: buying a franchise — Gary Landa @ 9:42 am


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