Franchising is highly regulated to protect the consumer. Some states like California seek even further protection for a potential franchise owner. California currently has proposed legislation in their State Assembly called “The Level Playing Field for Small Business Act of 2012″. This legislation would provide significant protections for franchise owners in a franchise agreement, if passed.
But the best way to reduce risk when entering into a relationship with a franchise company is to conduct thorough due diligence on the front end before any decision is made. Becoming a franchise owner can be the start of a wonderful new life, IF the potential business owner is qualified and selects a strong franchise brand that is well suited to their personal skills and interests.
If you are thinking of owning a business, here are 7 areas to evaluate that can greatly reduce your risk.
1. Length of time in business: Franchise companies should have a track record of running their own corporate stores for at least a few years before deciding to franchise their concept. Essentially, they need this time to refine their model and make sure it is successful in the marketplace and that their model can be successfully replicated by franchise unit owners with varied backgrounds.
2. Length of time franchising: A really strong franchise brand recognizes they are actually in the franchising business, not necessarily the particular business they represent that offers goods and services. The franchise company needs to be very good at supporting all the franchise owners that are investing in their brand. They need to make sure all the supporting systems such as training, operations manuals, sales and marketing, etc. are working properly – enabling the franchise unit owner to grow and potentially become more successful than an independent owner would be. Otherwise, why would they purchase a business franchise to start with?
3. Leadership experience: It is vital that the executives running a California franchise (or in any state) have extensive and successful experience in franchising and that some have backgrounds relevant to the products and services offered by the franchise. Poor executive leadership results in bad blood between the franchise company and the franchise unit owners.
4. Financial strength: Just as a franchise unit owner should have ample financial reserves, so should the franchise company. The financial resources of a franchise can be found in their “Franchise Disclosure Document” (FDD), which they are required by law to give every potential franchise owner. The FDD will provide information addressing each of the seven risk areas in this list.
5. Failure rate: Just about every franchise brand will have some franchise unit owner failures. These can be due to poor health, personal issues, bad fit, financial difficulties, etc. However, if there are several failures and especially if they have occurred in roughly the same time period, this is a red flag, warranting a full explanation.
6. Lawsuits: If the relationship between a franchise company and unit franchise owner deteriorates to one of litigation, it may affect the image and performance of a brand overall. A good franchise company will do everything possible to avoid lawsuits, but unfortunately they may still occur. Keep in mind that proper due diligence while investigating a franchise and executing a sound franchise agreement will reduce the chance of lawsuits occurring.
7. Franchise owner satisfaction: Prospective franchise owners need to validate, validate, validate and not only with the franchise company, but with existing franchise owners as well, preferably at their place of business which facilities open communication. Most franchise companies hold a “Discovery Day” where a potential franchise owner will meet with the franchise company executives and support team. The Discovery Day should be a time where each party can really evaluate one another.
To learn more on how to investigate a franchise the right way, in order to reduce risk, take the next step.
Investing in a new business is a big step and is a major life decision. With so much at stake it makes sense to get help. An expert franchise adviser understands how to conduct due diligence and can help guide you through the process. The adviser will educate you and give you the tools so you know how to address each of the seven risk areas listed above before you purchase a company for sale. Any new venture entails risk, but when you know how to properly assess it, you should feel confident in your ultimate decision. Owing a business can be very rewarding if you have done your homework upfront to know it is the right business for you.
For more information on how a franchise adviser can help you explore business ownership, Contact us. There is no cost or obligation for our service.