How to Choose a Franchise

With the economy in this condition, people are losing jobs.  When folks lose jobs, some percent of them will opt to strike out on their own and start their own business, rather than looking for a job.

Some percentage of those people are going to be drawn to the allure of a franchise.  So, I'm going to try and outline a few general principles for people who are considering going down this path.  To me, being a franchisee has been a phenomenal experience.  I am thankful every day that I was fortunate enough to find my franchise system.  I think the support I get from them is great.  I think the business model they provide is outstanding.  It has improved my life in every conceivable way.

However, that's not the case for everybody.  Franchisees go out of business every day.  In fact, a few recent studies have indicated that franchise-startups fail at about the same proportion as independent (non-franchise) business start-ups. 

If you're like I was, you'll probably take every penny you've ever earned and invest it in your new business.  The thought of rebuilding from zero in my 40s wasn't particularly appealing to me.  So, I wanted to stack the odds in my favor.

I did this by researching franchises.  They're not all good.  A rough thumbnail, in my opinion, is that if you took a list of all your available franchises, 95% of them will lead to your bankruptcy.  Now, in that list will be a lot of new, smaller, unproven systems.  Still, this is just to impress upon you that just because you're buying into a franchise system doesn't mean you won't go broke.

The first step in researching is to find out what your available capital to invest is.  How much actual cash (non-borrowed) can you put your hands on.  Most franchises have what they call a "liquidity requirement" meaning they won't sell you a franchise if you don't have, say, $100,000 in cash.  Different systems require different liquidity and I'm aware of a few that require a seven-figure liquidity number before you can talk to them.

Take this liquidity number seriously.  If you ask me, most liquidity numbers are understated.  Meaning, if they say you need $100,000, the actual number is probably closer to $150,000.  They're literally telling you the DEAD MINIMUM cash you should have on hand before considering what they have to offer.  A good franchise system will know what they're talking about on this.

The liquidity requirement will cut down your options substantially.  You won't be able to buy into, say, Volvo Rents if you only have $50,000 to invest. 

Start with a list of all available franchises and then whittle it down to the ones you qualify for, financially.

Lists are available in a lot of places.  The one that was my favorite was the listing on Entrepreneur.com. 

After that, look for other qualifications.  Many of the better food-service concepts do not want you if you don't have previous multi-unit food service management experience.  Others prohibit absentee owners.  Don't fudge your qualifications.  If you can't do the thing full-time, look for concepts that allow absentee owners.  Again, a quality franchise system has good reasons for their requirements.

Now comes the real legwork.  Every franchise system in the US is required to have a Uniform Franchise Offerring Circular.  Some will require an application fee to see their UFOC.  Some will not let you see it until you fill out a detailed application.

However, in some cases, you can get around this by searching for the UFOC on the Caleasi site:

http://134.186.208.228/caleasi/pub/exsearch.htm

Review this document and have some good questions ready.

Next, pick up a telephone and call people who are currently in the system.  My advice:  don't wait until you're deep in the process to do this.  Just do it.  There is no law or rule against it.  Some folks won't want to talk to you.  Some folks will chat your ear off.  Just be honest:  tell them you're considering investing your life savings into their franchise system and you want to know their experiences as an owner.

Not everybody will be sympathetic enough to cooperate, but some will.  Listen to them.  They will tell you the good in their system, but they'll tell you the bad, too.  I was warned off of many, many bad systems and market segments by owners who took the time to give me the real scoop.

I cannot emphasize enough how these interviews will inform your decision.  If you take a UFOC to an attorney, they'll tell you that the franchise agreement is completely biased in favor of the franchisor and you'd be foolish to sign it.  From an attorney's perspective, they're right. 

From a business perspective, though, they may not be.  However, an owner will be more than happy to tell you when they feel their franchise system is screwing them over.

Sometimes, I was able to get hold of somebody who USED to be part of a franchise system, but got out.  Not all of them were negative towards their old franchisor, but many were.  Mostly, they were very honest and objective because they truly had no reason to flower things up at all.

If you can get somebody to agree to let you visit their facility, that's worth a lot.  I would even advise volunterring to WORK for the franchisor for a day or a week or whatever, to get a feel for what life is really like in the franchise system. 

Once you've conducted your research, you can submit your application, application fee, and schedule your visits to the franchisor.  At that point, you should already have a good idea what you're getting yourself into.

A final note regarding franchises:  some folks consider this the minor-leagues of small  business.  Whereas, more conventional entrepreneurs are the big leagues.  I think that's not particularly true.  Many franchise concepts allow you to grow into a business with sales of $10 million, and in many cases even more.  Franchising is not better than, or worse than other more entrepreneurial business concepts.  It's just an option that's available to you. 

Best of luck if you chose to go this route, but chose carefully.  It has the potential to be either the best or worst decision you've ever made.

Some Perspective on the Economy, by the Numbers...

I really do hate the current economic climate. No doubt, it's causing pain for a lot of us. For some, it's been an absolute disaster. Even those who have been relatively unscathed are afraid for their financial well-being like never before.

It's tempting, at a time like this, to want to throw the baby out with the bath water, declare that the United States is broken, and that we need to change everything from the ground up.

Unfortunately, the numbers don't bear that out. Don't get me wrong: we really do need to do some tinkering with the model, especially in regards to banking, insurance and health care reform.

Underneath it all, though, the greatness of America is still evident. So, let's not be too eager to tear down the things that could continue to keep us great through the 21st century and beyond.

Let's not lose track of the fact that China may have an astounding growth rate, but that in absolute terms, the US economy has grown more in the 21st century than the Chinese economy has grown in the last 3,000 years.

Literally, we created an entirely new economy, the size of China's entire economy, in less than 10 years right here in the US.

By this I mean, that the entire Chinese GDP is roughly 5 or 6 trillion dollars. (Depending on a lot of factors, and how you measure GDP and against what standard.)

Our economy has grown by about 5 or 6 trillion dollars since the turn of the century.

Literally, it took 3,000 years for the Chinese to grow as much as we've grown in the past 8 or 9 years.

Yes, their growth RATE is impressive, but the reality is that it's only impressive because their economy is transitioning from a medieval agrarian soceity to a modern industrial one. They're literally transitioning from beating the ground with sticks to stealing US intellectual property to build with CNC machines.

In the mean time, they have an abysmal record on human rights, and if not for the fact that they steal all the intellectual property they lay their eyes on, they wouldn't have an economy at all.

The US definition of "poverty" is such that, frankly, only a statistically insignificant number of Chinese people are not living in abject poverty by US standards.

Don't envy them. They can't enjoy double-digit growth rates forever. Once they're industrialized, they'll be subject to the same laws of economics that we are.

We had double-digit growth rates, too, when we transitioned to an industrially based economy, 100 years ago. Difference is, we pioneered that technology. China hasn't pioneered anything in a thousand years.

I wouldn't advise you to put too much of your betting money on China to dominate the US anytime soon. They have to prove they can do something other than steal US innovation and produce it with sweatshop labor ignoring all environmental impacts before I'll consider them a threat to the US.

Our unemployment rate is approaching 10%. Some of you who have travelled to Europe know what I'm going to say next. At our worst... as in "worst since the 1930s", our unemployment rate is basically approaching European unemployment during the best of all possible conditions.

France always has an unemployment rate of about 9.5%. Always. Germany and the UK do a little better with historical unemployment rates of about 7%. The US? Those types of unemployment rates are scandalous and indicative of an economy that's badly off-track.

Those, by the way, are comparisons against pretty much the best and brightest the world has to offer.

So, before we declare that the era of US exceptionalism is over, let's take a deep breath and remember that by almost all measures, the US is still an economic engine that's the envy of the world.

If we can avoid changing things too much, we can lead the world out of this recession and beyond.