Last month I participated in a business forum where one of the panelists stated that owning a franchise is one of, if not the worst way to open a business. He further added that if someone wanted to start their own business they are simply
is franchising bad business?
better off creating their own idea, creating their own brand and starting on their own…
Considering the panel included entrepreneurs, bankers, a business and franchise broker (not me), an attorney and business coach, I’ll let you guess which member made that statement .
But questions remain…
Was this person right?
Is owning a franchise a bad way to enter a business?
Considering I have my own franchise consulting and brokerage firm you might think I am biased in one way or another. Be that as it may, let me take a stab at these questions.
Regarding the first question, was the person right? The answer to the question is NO. Franchise is NOT the worst way to get into a business. Well I guess I answered both questions right off the bat, but before you start thinking that since I do “franchise consulting and brokerage” and thus of course I am going to think this way… here me out.
There are a lot of horror stories regarding franchising. If you google the web, you will run across countless stories regarding people who lost A LOT of money and failed miserably with a franchise. If you’re curious you can do some research and you’re bound to run across many examples… In fact, I have been brutally attacked by critics and former franchisees when I provide any sort of debate regarding the viability of the industry… and while I hate to see people fail, and I know there are many poorly run franchise models, it doesn’t mean owning a franchise is the wrong way to own a business.
So does that mean franchising is a bad business option?
The answer is certainly not, and while I am not going to perform a statistical analysis (much to the chagrin of my critics I would add that for every negative story you can find a positive one. My point here is, just because people failed, doesn’t mean franchise ownerships is a bad way to enter a business… and while you still may want to consider the source, there are many franchises, franchise consulting firms, brokers, attorneys, lenders, and franchise owners who would agree, argue and provide examples of many people who have been VERY successful with a franchise investment.
So how do I know if a franchise is right for me?
Well, that’s the $64,000 question. In my experience and after having discussions with a few franchise consulting firms, brokers and franchisors, it depends upon a number of different factors including the quality of the franchise, a willingness to learn and follow the system, having enough start up and working capital and also making sure it’s a business the person actually enjoys. That’s really the hidden element… enjoying what you do. I would further add that franchising is NOT for everyone. Too often I run across people who want to buy a franchise because they think in GUARANTEES success, which could not be further from the truth. I have been doing both franchise consulting and brokerage for years and nothing bothers me more when a concept uses the phrase “recession proof” to describe their model. The reality is, owning a franchise has risk… just like any other investment.
The bottom line here is a general statement… “franchising is the worst way to open a business” is just plain wrong. Saying that is just as bad as someone saying owning a franchise guarantees success. If you’re serious about the concept… I highly recommend doing your research. Educate yourself about the industry and speak with people (particulary franchise owners) about their experience. In addition there are many local and national franchise consulting and brokerage firms and franchise attorneys you can speak with. This can help teach you about what to look for and make the best possible decision for you.
Franchise consulting is a field similar to any other consultant-to client relationship whereby the franchise consultant would charge a fee to a client in exchange for a particular service. This is how the field was traditionally defined. If a
Say what you ARE!
franchisor needed a particular service, whether it was the formation of their franchise agreement, business planning, marketing and sales advice or any other type of third party consulting services, they would hire the consultant, draft a contract and scope of service and pay consulting fees.
In the last few years, the definition has been changed as various franchise sales networks borrowed the term “franchise consulting” or “franchise consultant” to describe “franchise brokerage”. Instead of charging a fee, the franchise consultant offers their services for free and only receives compensation if their client happens to purchase a franchise. If you are interested in reading more about this shift in definitions please click to read this article.
It’s my opinion that this new definition undermines the concept of franchise consulting as a service. In addition, to those who are marketing themselves as franchise consultants, when they are essentially franchise brokers amounts to nothing more than a misrepresentation of what they offer.
It’s a little disingenuous to describe yourself as one thing, when in fact you are doing something else. This is an that issue stirs a lot of debate in the franchise industry, and unfortunately, as franchise networks continue to expand, it could potentially marginalize it. I have seen this issue discussed on linked in forums, trade shows and franchise radio programs. While I have not conducted any polls, I imagine if I did, those in the industry prefer the traditional definition.
Please note, there is absolutely nothing wrong with franchise brokerage. Franchise systems are looking to expand their brands and many concepts leverage their relationships with various brokerage networks to bring them qualified candidates in exchange for a commission. It’s no different than residential or commercial real estate brokerage, mortgage brokerage or leasing brokerage. A fee is paid for a service performed.
The issue here is simply to accurately describe and define the role. If you are a franchise broker that is compensated by selling franchises, call yourself a franchise broker. If you’re in the field of franchise consulting and are providing additional services for a fee, call yourself a franchise consultant.
While I don’t foresee this debate getting resolved in the immediate future, as the franchise industry continues to mature, I think all of us would be better served by calling ourselves what we actually are. A close colleague and fellow franchise broker loves to use the phrase “fransparency”. Essentially it’s all about full disclosure. If we place more emphasis on this concept, the franchise industry would better position itself for the future.
If you stumbled upon this post, you’re probably wondering what crabs and a basket have to do with buying a franchise. Let me explain…
In my franchise consulting practice, I advise people on whether business ownership, particularly “buying a franchise” is a suitable option for them. Many times during this process, clients will seek the opinions from personal friends and family during their research. While I think it’s important to seek input from your loved ones, especially your immediate family, if that’s your sole source of counsel it can soon become problematic.
You see, sometimes those close to us are afraid of our potential success. When we speak with them they can project their own insecurities, fears and desires on you… Regrettably, at times they want to hold you back.
This is what I mean by “crabs in a basket”
Have you ever seen a basket full of live crabs? If you have, you might recall what happens when one of the crabs tries to climb out. Just before they reach the top, the other crabs reach up and pull them back… it’s a vicious cycle that repeats itself over and over again. One gets nearly free and soon the others reach up and pull it back…
I see this everyday in my franchise consulting practice. In this case people are looking to own their own franchise business. They find an opportunity, do the research, determine it’s something want to do, yet their friends try to talk them out of it…
Now considering the fact my chosen vocation is franchise consulting and I earn a living via franchise sales you might say to yourself…
“Hey, you do franchise consulting… isn’t franchise consulting all about selling franchises? You obviously might be a little biased.”
If that’s what you are feeling, then your cynical like me J. Believe me, I can see why you might feel that way, however, the reality is I don’t care if someone chooses to buy or not buy. The point I am trying to make is sometimes advice from friends and relatives can sometimes be biased… and NOT in YOUR best interests.
This begs the question…why? Why would a loved one or close friend project fear, reservations, or even attempt to hold you back? The answer to me is that it’s human nature…nothing more. I don’t try to understand it, justify it or rationalize it… it’s just the way it is.
So how can you avoid the crabs from pulling you back?
This is a question I get pretty often from clients. It’s one of the reasons that franchise consulting is more coaching oriented than many people think. What I always suggest is to first, educate yourself as best you can on the opportunity and seek advice from OUTSIDE your immediate friends and family. I have a number of mentors that I constantly lean on when I need help with a situation. These people are not FRIENDS, but I do value and trust their opinions. Some examples of people that can help you make the right decision could include a business attorney, a CPA, a business coach or even someone you know who has experience in owning a business. What you’re looking for is open, honest and unbiased feedback.
If you are considering a franchise, a business, or desire anything for that matter, think about this concept. I have seen many close friends get caught in that basket… and every step they make to free themselves, they regrettably always seem to get pulled in. If you find yourself in this situation, think about this concept and focus on finding a good mentor. They can provide open and honest feedback to help move you FORWARD, versus pulling you BACK!
Man… It’s the “what ifs?” killing you… nothing else… There’s virtually nothing gained from them other than increased stress; which is something we don’t need more of.
I am an eternal optimist. I realize there are consequences regarding any decision I make. I always tend to do the classic “cost-benefit analysis”. My mind is programmed to think that way… I accept the possibility of a bad decision. I am totally comfortable if things don’t work out. It’s an empowering feeling of freedom. It keeps me moving forward…
If there’s one thing I can’t stand it’s the analysis paralysis of people who lack the capability of making a decision… I also abhor those who cannot accept a bad decision for what it is… nothing more… You see, while it’s important to learn from a bad decision. You cannot keep looking back. You have to let go and “move on”.
If you find yourself caught in the “what ifs”… ask yourself why you are tossing and turning so much… Look at the decision you are trying to make…
Do the potential benefits exceed the costs?
What is the worst that could happen? And … more importantly… What’s the PROBABILITY of the worst thing happening? Chances are it’s so low it’s not worth the worry…
Lastly, if the worst did in fact happen… Could you handle it? I’m pretty sure you could…
If your stuck in the “what ifs” … Try the above mentioned approach… I think with a little practice you’ll become more comfortable in making decisions and will soon enjoy the empowering feeling and comfort that comes with the ability to make them without worry….
There are a number of ways to purchase a franchise. You can contact the franchise directly, attend a trade show, or work with a franchise broker or franchise consultant. Most folks start their research by seeking information on the Internet. If you’ve been in the market and requested information about a franchise, there’s a good chance you’ve already been contacted by a franchise broker offering to help you.
There’s a lot of debate in the franchise industry about the pluses and minuses of using a franchise broker. In addition, there’s a lot of confusion and debate as to the differences between a franchise broker and a franchise consultant. I think wikipedia explains it best. For more information on their explanation please click this link.
What is a franchise broker?
A franchise broker is someone who sells franchises for a percentage of the franchise fee. There is typically no mark up or additional fees if you elect to use their services. If you choose to work with a franchise broker, make sure you have a CLEAR understanding regarding their compensation.
What is a franchise consultant?
A franchise consultant is someone who provides additional services to both individuals and franchisors in exchange for a fee. These additional services can include marketing assistance, financial analysis, raising capital, sales training, strategic business planning and franchise brokerage.
Most brokers and consultants are part of a larger network where they have pre-arranged relationships with 100 or more franchise concepts. These concepts will typically include a cross section of different industry types, including food, retail, health care, business services and many more industries.
Should I work with a franchise consultant or franchise broker?
It’s a personal choice as to whether you want to work with a franchise broker or franchise consultant. This is my chosen profession and thus you have to consider the source when reading this article. J There are a lot of benefits to working with a franchise broker, and since most offer their services at no additional cost it might be worth looking into. Regrettably, like all industries, not all brokers are good and or have the best business practices. If you do some research on the topic you’re bound to run across some bad press.
My opinion is it’s simply a matter of personal choice. For experienced business owners, the services of a broker are not always necessary. For first time buyers with no experience, it may be an attractive option as they can help educate you on the process.
The next step
It’s important for you to be comfortable with your broker. Buying a franchise is a financial and lifestyle commitment. The best brokers will be informative, well versed in the industry and act as an advisor. The process should be helpful, not pushy or have high pressure to buy.
If you’re speaking with a broker, ask a lot of questions. Take the time to be comfortable with their services and have a clear understanding of both what they offer and your financial obligation, if any. If you’re uncertain, always ask for references. I also recommend working with a qualified franchise attorney and CPS. They can help you assess the legal and financial risks and help you make a more informed decision.
There are a number of different ways to invest in a franchise. Whether you simply want to focus on a single unit, or perhaps develop multiple territories, there are a number of options available. If you’ve been researching the industry, some times the different types of ownership options can be very confusing as sometimes people use different definitions for different types of ownership types.
In this article I would like to discuss the concept of Area Development.
Area development is where a franchisee agrees to own and operate multiple units in the same geographic location. In this type of agreement, the franchisor sells a defined region where the franchisee agrees to open a pre-determined number of locations over a defined time period. This is where Area Development is different than Regional Development or Master Franchising.
A defined territory and set number of units to be developed…
When you’re an Area Developer (AD) for a franchise, you are required to develop a set number of units over a certain time period. The size of the territory and the number of units will vary depending on the market. You will typically start by opening one location, with additional units opening every twelve to eighteen months. In a Regional Development arrangement, owner of the territory can determine the number of units to open within the market. They have a lot more control in the process versus an AD.
Experience is required…
Area Development requires a bit more experience and investment capital versus operating a single unit franchise location. In this arrangement, you’re typically looking at opening a minimum of five plus locations. Area developers can be the sole operators of their locations, or, if they choose, can actually be responsible for selling additional territories if that’s how they prefer to grow their business. This is all a function of your business goals, as well as the agreement with the franchise.
The Advantages of Area Development
Area development can be a very lucrative opportunity for all parties. The franchise will engage in this type of arrangement because it can help them expand their brand faster. Essentially they are outsourcing, or sub-franchising the opportunity and partnering up with an experienced business owner. The AD will be responsible for opening new locations and assisting and supporting the new franchises in their territory. In exchange for this support, the AD will receive a split of both the franchisees and royalties within their territory. This provides the AD with the opportunity to build residual income for their locations. As the royalties are typically based on a percentage of gross sales, there is a strong incentive to help franchisees in their location with their business.
Requirements to be an AD
The costs to purchase the rights of a particular territory will vary depending on the size and number of units to be developed. Since you’re typically looking at a minimum of 5 units, the initial fee can range from $100,000 and up. In terms of the total capital needed, that will depend specifically on the type of business. A successful AD will have good business skills including, sales, marketing and management. Since you’re overseeing and supporting multiple business owners, you need to have the necessary skills to oversee multiple business operations and be comfortable in managing people.
validated with both current and former franchisees, the next and final step in the process is to visit the headquarters of the franchise. This step called Discovery Day and it’s typically the final step in the process before you sign your franchise agreement and pay the franchise fee to get started.
The structure of a discovery day will vary depending on the franchise system. In fact, some franchises will schedule your visit much earlier in the process. Most concepts, however, will have a discovery day at the very end, after you have completed most of your due diligence, as this can make for a more productive visit.
The best way to think about your discovery day is an opportunity to learn more about the system and feel comfortable that it’s right for you. Some franchises schedule them on a regular basis that can include up to 20 other candidates interested in becoming a franchisee. Others prefer a one on one meeting that is less formal and more intimate. In either case, during your discovery day you can expect to:
Tour franchise headquarters – This is a chance to see the company in action and understand the corporate structure.
Visit with management and key personnel – Meet the leadership of the franchise and have a better understanding for their long-term vision of the company.
Meet with current franchisees and visit a location – If you haven’t had a chance to tour a location in operation, your discovery day is a good chance to see first hand what it’s like to operate the business.
Learn more about the system, products & services – Get a better understanding of the business model, and how products and services are delivered to your location and then to a customer.
Your meetings with management and support personnel are perhaps the most important part of your discovery day. These are the people that will help train and support your business. In addition, you will also have a chance to speak directly with senior management to get a feel for their skills and vision for future growth.
The franchisor will also be looking to determine if you’re a good candidate for the system. In addition, it’s also a way for them to determine how serious a candidate is about buying into their franchise. While some visits can be informal, it’s not uncommon for you to have to go through and interview so the franchise is comfortable that you have what it takes to successfully operate the business.
Discovery day is an opportunity for both you and the franchise to learn about each other and if the franchise system is right for you. While each concept will have a slightly different approach, the concept is the same. All parties want to determine if they can work together and form a long term profitable partnership.
If you’re serious about buying a franchise, a great way to educate yourself about the industry is to attend a franchise trade show. There are many franchise trade shows scheduled in cities across the United States throughout the year. If you’re an experienced franchise owner, a franchise professional, or new to the industry, there’s a lot to learn by attending.
Visit many concepts… they’re all in one place…
One advantage of attending a franchise trade show is you’ll have the opportunity to meet and speak with many different franchise concepts in one day. While the process may seem overwhelming, these events are typically scheduled over two to three days so you can take your time to absorb as much information as you need. While there’s much to learn when attending a franchise trade show, if you’re a serious buyer it might be worth traveling to one of the larger events in Los Angeles, New York, or South Florida. For a schedule of upcoming franchise trade shows please click this link.
Speak directly with the franchise…
Learn about the industry... see if a franchise is right for you...
Another advantage in a franchise trade show is the opportunity to meet with the franchisor directly. In addition to meeting with the franchise development, there’s a chance to sample the product or service, learn about future expansion plan and get the newest information available regarding the opportunity. It’s almost like a mini discovery day.
Learn about the franchise industry…
In addition to meeting with different franchise concepts, a trade show is a great opportunity to educate yourself on the basics of franchising. Most trade shows will have a number of seminars and symposiums on various franchise topics. This can provide a good foundation and help you determine if franchise ownership is right for you. Listed below are some of the topics discussed at the International Franchise Expo:
Choosing the Right Franchise
Use Your IRA or 401(k) Money to Start a New Business
Buying a Franchise the Smart Way
Secrets to Success for Master Franchising
Meeting the Franchisor
This is just a sample of some of the topics that are discussed. These seminars are presented by veterans of the franchise industry. It can be a great opportunity to educate yourself on all aspects of the franchising.
Franchise trade shows are hosted all over the world.
Network with franchise owners…
Another advantage in attending a franchise trade show is the chance to network with current franchise owners as well as those interested in buying a franchise. There is no better source of information than someone who has experience in owning and operating a franchise. If you attend a show, take the time to meet with other attendees. Ask them questions about their research, what they like and what to look for when performing your research. This will provide valuable insight to help you make a more informed decision.
Your next move…
Buying a franchise is a major financial and lifestyle commitment. As a franchisor, I can tell you that a more informed and educated franchise prospect will make for a better franchise owner. If your serious about buying a franchise, attending a trade show is a great way to learn about the industry, meet with different franchise concepts, network with franchise owners and help you make a more informed decision.
It’s a personal choice as to whether you want to work with a franchise broker when deciding to buy a franchise. Please note, as this is my chosen profession, I encourage you to consider the source when reading this article J.
There are an estimated 3000+ franchises available in the United States today. The most popular method of research starts with an Internet search. If you’re interested in seeing what’s available, try googling “buy a franchise” or “franchise opportunities”. You will find numerous opportunities… and the process can quickly become overwhelming.
If you’ve started your research this way, there’s a a good chance you have been already contacted by franchise broker. Most of these franchise websites that come up on the first page of Google are simply lead generators. You want information, you submit a request, and someone will quickly contact you to answer your questions.
Warning Signs
While a good franchise broker can help you make a more informed decision, it’s important that you’re comfortable with both their knowledge and approach. There is a lot of debate in the franchise industry about the pluses and minuses of using a franchise broker. If you do some research, you will likely find a lot of negative press about franchise brokers. You will hear about brokers who:
Use heavy-handed and high pressure sales tactics…
Have a lack of knowledge about franchising…
Provide inaccurate statistics about the industry…
Over-promise results…
While I am not here to defend the industry, the unfortunate reality is you have to be careful when deciding to work with a franchise broker as not all are the same. Please note, despite the negativity, there are a number of reputable franchise brokers who CAN and WILL add value to those seriously considering franchise ownership.
Be comfortable… Understand the process
If you’re thinking about working with a franchise broker, here are a few tips to consider:
Have a clear understanding of their services including their compensation. Most brokers are paid directly by the franchisor as a percentage of the franchise fee. There is no additional mark up. Like any business relationship, I would recommend having this in writing.
Ask a lot of questions regarding their experience. Their value to you is knowledge and expertise. A good broker can help save you time and focus on franchises best suited to meet your income and lifestyle goals. Ask them about the industry, the process, and what it takes to be successful. A good broker can and should be able to provide valuable guidance to help you make an informed decision.
Be comfortable with their approach. There’s a saying in the franchise industry. You don’t sell franchises, but you help people buy. If you feel pressured, and or experience heavy handed sales tactics, walk away.
Most franchise brokers are part of a larger network where they have pre-arranged relationships with 100 or more franchise concepts. These concepts will typically include a cross section of different industries depending on the type of franchise their clients are interested in. A good broker will have a number of different options available and be well informed on the business model and the type of candidate the franchise is looking for in a franchisee.
The next step…
Buying a franchise is a significant financial and lifestyle commitment. A qualified franchise broker can help save you time, and help make and more informed decision. If you decide to work with a broker, consider the items discussed in this article. In addition, please note a broker is only PART of the process. When considering franchise ownership it’s important to work closely with your CPA and a qualified attorney as they can help you navigate the legal and financial aspects that are so critical to your success.
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