The 10 most important questions to ask yourself if you're thinking of buying a franchise

 by Mark C. Siebert, CEO The iFranchise Group

Every time I go to a party, I am inevitably buttonholed by three or four would-be business owners and asked “What is the best franchise to buy?”   A simple enough question – but unfortunately, one that does not have such a simple answer.

If a prospective buyer has narrowed their list, I will tell them all about assessing risk versus return and evaluating the value proposition, but for someone who is not so far down the pike the short answer is, “That depends almost entirely on you.” 

For these people, I tell them to start and finish by looking inward.  And with that in mind, I have come up with my own, “Top Ten List” of questions I would recommend everyone answer before buying a franchise.

1. Am I ready to clean some toilets?

The first thing to realize when making a decision about business ownership is that “the great American Dream” simply is not for everyone.  Being in business for yourself is simply not as glamorous as some might have you believe.

Start with the basic reality of business.  If you are a corporate refugee (or planning on becoming one), small business works differently than the world to which you may have grown accustomed.  While you may not literally need to clean the toilets (unless, of course, you are buying a janitorial services franchise); you will certainly find yourself wearing many different hats – some of which you may not enjoy. 

And that’s just the start of it.  At least when you first start in business, you can forget about weekends and vacations.  You are building a business.  And regardless of whether you choose to franchise or go into business for yourself, figure on a few sleepless nights while you wonder if you made the right decision and where the next payroll will come from.

2. Am I a cowboy?

I firmly believe that entrepreneurs make the world go round.  But too much entrepreneurship in a franchise system is a recipe for disaster.

True entrepreneurs are, in my experience, people who never saw a rule that they did not want to break.  But in franchising, that attitude will likely cost you your franchise.  The best franchisors have systems that they enforce rigorously, and if you cannot live within those systems, franchise ownership is not for you.  You may make a great businessman, but stay away from the franchisee side of franchising.  (Of course, most franchisors I know fit squarely within this category.)

Ask yourself if you can follow the franchisor’s systems, or if you will feel you are compelled to tweak the systems or innovate.  Franchising is about following the rules, and it does not provide you the freedom to break them.

3.  Do I have the legs for it?

While franchising can significantly reduce your costs of getting into business by eliminating many of the costly mistakes that the unguided entrepreneur might otherwise make, it is not a “no-cost” means of going into business. 

In franchising, the franchisee is expected to bear all of the costs of starting the business, plus pay a franchise fee.  For most retail businesses, the price of entry starts at $100,000 and goes up from there (Service businesses can be less).  And while some financing may be available, you will certainly need to have some substantial resources to get started.

If franchising is the route you choose, the franchisor will be legally required to provide you with a Uniform Franchise Disclosure Document (FDD) early in the sales process.  The FDD is much like a securities disclosure – it contains information provided by the franchisor in 22 prescribed areas – including an estimate of your total start-up investment.  But exercise caution.  The investment ranges disclosed by franchisors can vary substantially, and are generally not subject to any outside scrutiny.

4. Am I ready to go “All In”?

Just having the capital is not enough.  You have to be willing to spend it – ideally without losing much sleep over it.  For some, a decision that requires us to part with a large portion of our savings can cause some sleepless nights.  But if savings alone will not do it, you may need to borrow, and that will require a good deal more intestinal fortitude.

If you borrow money to get started, chances are you may need to put your house on the line.  Add to that the fact that most franchisors will require personal guarantees, and will often ask spouses to sign these guarantees as well. 

5. What do I want to do when I grow up?

If you get past the first two questions, the decision as to which franchise you should buy should start with passion.  The prospective franchisor oftentimes starts and finishes their search with a purely financial focus.  But franchising is more than an investment vehicle.  For most franchisees, it is a lifetime commitment.  And as such, start by looking at franchises that will let you do something that you love. 

And make sure you are answering with a dispassionate heart.  A business that may be alluring on the surface may be less attractive once you have gotten past the surface and into day-to-day operations.  Be sure to ask yourself just what you will be doing day-in and day-out. 

6. Do I look fat in these pants?

Deciding on a franchise also requires honest self-assessment.  All of us have different skill sets.  The important question for prospective franchisees is how well those skill sets match up with the franchise in question. 

If a particular franchise requires sales skills you do not have, no amount of training provided by the franchisor will ever make you a great salesperson. 

7. How much is that 800-pound gorilla in the window?

Once you have narrowed down your list of franchises to those that would be a good fit for you, you need to get out your crystal ball and see if you can determine if the franchises you are examining are well positioned to take advantage of the trends in the marketplace.  That means more than just assessing where the franchise is currently.  It means trying to understand the factors driving a particular market and determining that market’s direction in the future.

Ask yourself if the business is adequately differentiated from its competitors and whether it has a sustainable competitive advantage.  Has the franchisor established a brand in the consumer’s mind?  Is the product offering sustainable, or a response to the latest trend?  And, if the market is growing rapidly, are there any 800-pound gorillas out there who might just try to take advantage of that growth? 

8. Can I quantify risk versus reward?

As you continue to look at franchises, your next job is to quantify risk versus reward as best you can.  While there are no simple ways of doing this, the FDD is a good place to start.

Some measures of risk that you will find in the franchisor’s FDD include:

• Franchise failure rate.
• Number of lawsuits.
• Length of time in business.
• Length of time franchising.
• Financial strength of the franchisor.
• Management strength of the franchisor.

Then measure your assessment of these risks against your assessment of your potential returns. 

Unfortunately, because of the way in which franchise disclosure laws are written, franchisors that do not choose to do “earnings claims” – which are defined as disclosures about sales, earnings, or expenses – are prohibited from discussing these topics with franchise prospects.  And, in fact, about 80% of franchisors choose not to do any earnings claims. 

And that means that you need to do some digging.  Probably every article ever written on buying a franchise advises prospects to call as many franchisees as possible, and this article will be no different.  Calling franchisees is the single most important step in your due diligence process.  Franchisees (as well as some past franchisees) are listed in the franchisor’s FDD.  Call them.  Visit their sites.  Talk to them.

Not only will these franchisees be able to provide you with information about sales, revenues, expenses, and potential profits, but they are your best source for understanding the day-to-day operations of a particular business and a wonderful tool for assessing the franchisor’s value proposition.

9. What is the franchisor’s value proposition?

Even if the business is right for you, before signing on the dotted line, ask yourself about the franchisor’s value proposition.  As a franchisee, chances are that you will be paying an initial franchise fee, advertising fees, and ongoing royalties that will, in the long term, amount to a significant sum of money.  In addition, you may be required to buy products from your franchisor on an ongoing basis, and may have other fees as well. 

So ask yourself what you get in return for those fees.  Does the franchisor have a strong brand?  Below-market purchasing power?  Proprietary products?  Great marketing and merchandising?  Access to prime retail locations?  Fantastic training and support?  What is the value that you are, ultimately, paying for?

A great source of this information are the franchisees that you are calling.  And there are two more sources that should never be overlooked: a good franchise attorney and a good accountant.  Spend the money.  This is an area in which being “penny wise” can be much more devastating than “pound foolish.”

10.  Do you have the fire in the belly?

There could easily be 1,000 questions listed here.  But when it comes to gut check time, I would recommend just one more.  Do you have “the fire in the belly?”

The prospect of being in charge of your own destiny is tremendously exciting.  If you are successful in your franchise, the upside is virtually limitless.   

And, like anything worth striving for, franchising requires hard work and dedication.  Ultimately, a big part of your success is about desire.  So before you make the final leap, look inward one last time, and ask yourself how much you want it.

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This article was originally published in October 2006 in Specialty Retail Report.  

Mark Siebert is the CEO of the iFranchise Group, a management consulting firm specializing in developing new franchise concepts for franchisors.  During his 20+ year career, he has consulted with some of the world's most prominent franchisors.  You can learn more about franchising at their website: www.ifranchisegroup.comor can reach him directly at info@ifranchise.net.