By
Bob Phibbs
I was COO of a small company in California that had an excellent concept for a coffee house, and using my proven sales training program had seen impressive sales gains and ROI.
Coffee was hot, and the owners decided to franchise. I saw what many didn’t want to see during their discovery day.
Even if the franchise sales team said how much work it would be when they got to franchise training to learn the "system," they acted like I had lobsters coming out of my ears – they were shocked.
I saw the good, the bad, and the ugly. From that experience, I can give you a good idea of what to ask yourself before you sign your franchise docs.
You might want first to consult this Inc. magazine chart of franchise failures and winners.
But no matter the franchise, you can’t play with it like a hobby. Here are five questions to ask when buying a franchise.
Do you understand what a franchise lets you do?
You are buying permission from a franchisor to sell their proven concept in a specific area. You buy a franchise to shorten your learning curve as they have (supposedly) a system that can make you money.
They inform you what systems to use and who they want you to hire, they create most if not all of your marketing, and they give you your store layout, signage, etc.
That’s all of the stuff if you were an independent, you’d have to spend hours, weeks, and days to create. That’s the good news, which leads to…
Is franchising right for you?
While it’s great to see yourself as an entrepreneur, it can be a double-edged sword when signing on as a franchisee. That’s because since it is their concept, there’s little to zip flexibility.
Operations must be conducted according to their plan and you typically must use the franchisor’s suppliers. (That’s how they keep your royalties lower.)
Are you comfortable having little control over your business and being judged on their standards?
I’ve seen it time and time again when someone buys a franchise and thinks they should be able to do whatever they want after they get it open.
But quite clearly, in your signed docs, the franchisor has told you in advance what you can and can’t do.
Why are you doing this?
If it is to apply yourself 100% to your business, I say, “Rock on!”
But if you are doing it to try to fill a hole in your or your partner’s lives – pass.
I had a franchisee who was pregnant go through franchise training. Things hadn’t moved along fast enough for the opening of the store, and she didn’t see how having a newborn would be a problem.
If you’re not passionate about the business and willing to be there, hands-on, 100%, you might be setting yourself up to fail.
Just like any small business, some franchisees would invest the build-out money, get bored with it and give control over its success to a son or daughter who had no interest in the venture.
Even worse, some would say they'd just "hire a manager" when they hadn't built that cost into their plans. You need to know what it takes to make a successful franchise location first.
Do I have enough money?
This is probably the most important question to ask when buying a franchise.
Many startups fail, not just franchisees, because the owners didn’t properly calculate the needed capital.
Cost overruns are bound to happen
One of our unique features of the coffee house was concrete tables – fine for the California locations. Still, if franchisees didn’t plan correctly, they paid express shipping for a dozen of them halfway across the country.
There are always delays
Plan to have access to twice the franchisor's projected opening costs, just in case.
If the business starts out slow or you have a cash flow crunch, you won’t be looking at your customers with dollar signs in your eyes. I hated when I went to a grand opening, and the franchisee said, “I’m out of money.”
Don’t let that happen to you ahead of time or you’ll make more decisions that could lead to de-branding or closing soon after you open.
Do you know enough about the franchise concept?
When I was with the coffee franchise, if I heard it once, I heard it a dozen times from franchisees, “It’ll be like Cheers with coffee."
Not quite.
90% of their customers will drink their coffee before 11 a.m. Some franchisees didn’t look past that and became concerned when they didn't know what they would do with the other 10 hours they were open.
There are a lot of things potential franchisees should look at. Shortlist, you need to be 100% committed to the venture - not simply look to sit on the sidelines raking in money.
That doesn’t work in any business.
These questions to ask before buying a franchise should help you get a fresh perspective and consider again if this is the right way to invest your money.
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