Review the tips before investing
Many potential franchisees fall in love with a new concept and want confirmation it will be as profitable as they imagine; others want to believe the information the franchisor provides — that’s where I come in. As part of my franchise practice I’m often asked to assess concepts and locations. The truth is a foodservice franchise operation is not likely to make you rich. Instead, expect to find a good job, own a small business and make a reasonable income.
If you want self-reliance and an association with a tested and systemized concept, buying a franchise may be for you. Just don’t assume everything the franchisor tells you in his marketing package is accurate; in fact, a disclosure document is the minimum information the company is required to provide under law.
So, do your homework, researching the franchisor and industry before making a decision. Below are tips to get you started.
Determine if you’re buying into a trend or fad
Foodservice industry trends last approximately seven to 10 years, which is about as long as a franchise agreement — with some exceptions. Fads generally last for a couple of years. So, investigate your concept of interest and determine whether it is a trend or a fad. In my opinion, coffee is a trend; poutine is a fad.
Run the numbers
Many potential franchisees believe a large organization will have stability and financial success, but that’s not necessarily true. Although many large organizations have considerable power, there are many who take advantage of franchisees, leading to unfair practices, disputes and lawsuits.
Once you find a company, meet as many franchisees as possible. Ask them if they are happy in the organization and whether the franchisor supports their franchisees when they are experiencing difficulties. Ask if corporate reps visit often and what the lines of communication are within the organization. Find out if you will be required to buy corporate supplies — if so, are they competitively priced?
Check the income stream
Don’t rely on a franchisor’s financial projections, which may not directly reflect your site and location. Instead, understand the market in which the projections are based and apply the data to the area you selected to determine realistic numbers.
In many cases the cost and profit ratios may not be realistic — they may not have even been achieved by a franchisee. Question the numbers and ask the franchisor for site-specific projections. If they don’t provide details, there is usually a reason. For example, maybe they don’t know how your location will perform financially. Remember: it’s your investment, not theirs.
Be mindful of the sales pitch
Many franchisors hire sales companies or brokers. Beware: these people are not accredited and make money selling a franchise, so they’re more interested in making a deal to earn commission rather than making the best deal for the franchisee. Many have several franchise names under their sales banner and are unlikely to challenge the financial projections offered by the franchisor. We recently found a company that exaggerated potential profit provided by the franchisor by 20 per cent. By the time we finished the number crunching, the franchisor’s projections were high, too. A year later, our projections have proven the most accurate. In short, the salesman does not work for you and does not necessarily have your interest at heart.
Define site criteria
Ask the franchisor if they have defined site criteria. If they do, get a copy and ensure the site they select for you matches the criteria. Many restaurants and franchisees fail because the site criteria has not been defined or followed.
Learn about the advertising fees
Ask how franchisee’s advertising fees are used, whether there is a marketing plan and if you can provide input. A good franchisor should be using the money for advertising alone — nothing else. They should be able to show you their advertising books, which would prove advertising income and expenditures. Asking for the information is reasonable, so take note if the franchisor refuses.
Find a recession-proof concept
Determine whether the business you are about to buy into can withstand a recession. Downturns in the economy occur typically every seven to nine years, followed by two to three very difficult years, especially in the foodservice sector. We are just coming out of a major downturn this year, so now is the right time to buy.
Determine where you are in the cycle when you buy your franchise and when the recession will hit, then assess whether you can survive the tough times. Ask the franchisor whether they have weathered a recession and if their franchisees survived? These are important questions when buying into a 10-year deal, of which only six or seven will likely be good. Save profit from the good years to cover costs in difficult times.
Seek out a committed franchisor
Is the franchisor committed to building a successful organization? Franchisors build their portfolios in two ways. Firstly, the success of the franchisor is based on the number of units they open, thereby relying on the franchise fee and building charges, which they incorporate into the build-out. In the other manner, they build slowly, selling the unit at near cost and relying on the royalty stream to earn their money. Personally, this latter group is the only organization that I would buy a franchise from.
Ask about franchisor investment
Ask what type of reinvestment the franchisor is making in the business. Are they building and updating manuals, training programs and products? A franchisor who’s investing in making franchisees stronger and smarter is committed to future growth. A franchisor who is not investing for the future and not reinvesting a part of its royalty revenue will not be looking beyond its short-term revenues and short-term success.
Check company history
Ask the franchisor if they have ever been involved in litigation. If they have, find out what the legal dispute was about. Assess the litigation and the information provided to determine if the problem was caused by the franchisee or franchisor. If it was caused by the franchisor, find out what they have done to rectify the problems brought to light in litigation. Franchisors learn from their mistakes and are not likely to repeat them. However, you should find out why they were in a dispute and determine if you can live 10 years or more with your new franchisor.
Determine how many franchisee units have been closed, either because the franchisee went out of business or the franchisor locked the doors. This is especially important when assessing young, small franchise companies as it shows their inexperience. Consistent problems are a sign they have not learned from their mistakes.
Keep a Cool Head
Franchisors have been known to pressure potential franchisees into making a commitment quickly. This bodes well for the salesperson who is earning a commission and a franchisor who is more interested in money than building a strong system. As a potential franchisee, don’t succumb to pressure. You will have to do business with your franchisor for at least 10 years, so take the time to choose the right one and to make the right decision. Several provincial franchise laws require a 14-day cooling off period so the franchisee is not pressured into an immediate decision. Unfortunately these laws don’t exist across the country.
Buying a franchise can be a great experience, and clearly the growth of the franchise industry proves franchising can be successful. But make sure you find the right fit and that the franchisor keeps his promises. Asking the right questions and talking to other franchisees will reduce the chance of choosing the wrong business, making your investment infinitely more worthwhile and rewarding.
Doug Fisher is Canada’s leading foodservice and franchise consulting practitioner, with a practice focused on franchise development, operations assessment and litigation support. His firm has been in business since 1984. Doug is author of four industry-related books, including Canadian Restaurant Accounting, and he is currently conducting operations and franchise assignments on three continents. He can be reached at (416) 489-6996 or [email protected]. For more information, visit fhgi.com.
image courtesy of Margaret Mulligan
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