Potential franchise candidates frequently ask me for the phone numbers of our franchise partners so they can validate our concept. If you have never seen or requested a Franchise Disclosure Document, commonly referred to as an FDD, the numbers of all current franchisees should be listed in the back of the document. I recommend that you ask the following questions as a starting point, because without the right answers to these questions you may want to look elsewhere!   

1) Tell me about your journey to find this franchise? - Everyone starts his or her search for a franchise with a journey. Remember your asking someone who was right where you are at some point! Why did they move forward? It will tell you a lot why you may or may not want to.  

2) Could you have done this alone, without being part of a franchise? If the franchisee feels like they could have done this without the franchisor, well, that defeats the purpose of buying a franchise. The franchisee should have no doubt that without the guidance of the franchisor they would have not been able to succeed to the extent that they have.

3) What does your franchisor provide you that benefits you the most? If franchisees can't tell you what benefits them the most about being part of the franchise system, then the franchisor may not be supporting the franchisees to the extent that you may need.

4) Is the Franchisor accessible when you need them the most? Every business will run into those times when you not only need an answer BUT you need it right now! Making sure that the franchisor is available during those times and responsive to the franchisees needs is critical. 

5) What is the impact been on running your business on your social life initially, and now? The most overused word in franchising is: absentee; business is hard and can cause a disruption in your personal life. You can imagine what your day-to-day life will look like, but talking to someone who is living it will give you the real picture.

6) How do you run your business, do you work in the business or do you use a manager? Some franchises you can run with a manager doing the day-to-day operations and some you can't. If you have a full time job that your planning on keeping you better find a franchise that can be run and run well with a manger.

7) What is the most challenging and what is the most rewarding part of owning your franchise? As I mentioned earlier, owning a business is not easy and you should try to find out what challenges the franchisees are facing. At the same time if there is no reward in what you are doing then what good is that? I always like to end with this question; it can go along way to fulfilling your dream or avoiding a nightmare!

These questions are a good starting point in your due diligence process. They will give you a clearer picture of the franchisors support and what your day-to-day life may look like if you buy into a particular franchise system. At Shear Madness Haircuts for Kids your success is important to us, our systems and process have been tested over a long period of time. But don't take my word on that, listen to one of our franchisees answer these questions on the attached recording, and good luck on your search!

You know, I'm amazed at how many people sign a franchise agreement and then fail to spend the proper amount of time finding a good location with a reasonable lease payment. If you look at the reasons that franchises fail, you'll often see two of the following listed: a bad location, and paying unreasonable (too high) rent. Finding a good location AND one where you are not paying excessive rent can be tricky. Think about it...A+ location landlords know that they can charge A+ rents. They have the high velocity traffic, visibility, and access that the tenant need. You may be able to go to a B+ or even a B space landlord and get a much lower lease payment. However you may not have the traffic that you need for your business to be successful, and as a result you'll need to spend a lot more on marketing in order to tell customers where you are. There are lots of variables when it comes to finding a space and I'll cover more of these later on. But for now, here are two of the easiest ways to avoid getting a bad space: 

Be Patient - Again, I'm always amazed by how many people sign a franchise agreement  - but then are so excited to get started that they sign a lease on a bad space. On the other hand I've seen people look for a space for so long that they weary of the process. And then to top it all off, the franchisor starts putting pressure on them to get open - so they sign a lease with sky high rent, which makes it very difficult to have a profitable location. Before you make either of these mistakes remember this, you assume an obligation to make payments for the LIFE of the lease. 

Have a Lease Attorney Review the Lease - Yes, I used the word lease twice. If your Brother-in-law is an attorney but he doesn't specialize in leases, it's best to just see him at Thanksgiving and not have him review your lease. Landlords will have your head swimming with terms like Severability, Subleasing, Joint and Several Liability, Default and Use of Premises (have I convinced you yet, or do I need to go on!). A good lease attorney can save you thousands of dollars on a five-year lease, and to me that's a good investment. 

Your franchisor should be able to provide you with a Proper Use Statement. In addition most franchisors will give you assistance and help in reviewing your lease. But remember this when it comes to dealing with Landlords and leases, "The devil is in the details", and only an experienced lease attorney can catch all those details.

Someone who was looking for a franchise asked the question that everyone eventually comes to recently asked me. When do I move forward? First of all I congratulated them for getting to this point! Franchise ownership is a great way to build wealth and gain financial independence. I answered them by giving them some reasons to NOT move forward with a franchise, here are some of those reasons. 

Questionable Profitability - Did you know that the FTC does not monitor or audit the Financial Performance Representation (FPR) of a franchise? If the numbers just don't add up or the Franchisor can't give you a satisfactory answer about the numbers in the Item 19 then you should probably look elsewhere. To complicate this issue more, many franchisors don't even provide numbers in their Item 19. Can you imagine buying an existing business from someone and them not providing you numbers? 

High Start Up Cost - If the cost to start up a franchise is really high compared to what you can earn on the bottom line that would be another red flag. This is most commonly referred to in franchising as the Asset to Income ratio or ASI. I have seen franchises that can make $100,000 with an investment of $50,000 and franchises that cost a million dollars to build out that only make $50,000. You do the math. 

Unfair Termination - I was recently reading an FDD and if the franchisee did not hit certain sales numbers after three years of operation the franchisor had the right to take over the location. You see these unfair termination clauses sometimes and the franchises that have them should be avoided! 

Inflated Prices on Supplies - I recently visited with a franchisee next to one of my Shear Madness Haircuts for Kids salons; he had invested in one of the most popular fitness franchises out there today. When I asked him how it was going he said, " Man, they are charging me a fee for everything I order from them!"  Most franchises provide you there own proprietary supplies. This can be a good thing and one of the reasons that you bought a franchise. You get to use there Trademarked items, proprietary systems and branding. Where the issue arises is this can be a major profit center for the franchisor and some franchisors markup these items to a point where it can dig into the franchisees margins. Make sure you understand what you have to order from the franchisor. It should be defined in the Franchise Disclosure Document (FDD). 

Moving forward with your franchise of choice should be an exciting time for you and your family. One of the things that will make it all the more exciting is knowing that you have done your due diligence and are comfortable with how your franchisor runs the franchise system. Making sure you have a handle on these four items is a good place to start. 

Franchise candidates spend a great deal of time studying revenues of various franchises. Yes, average revenue is an important number when researching franchises, but that only tells one side of the story. 

 

Expenses are the cost incurred in the operation of a business and have a HUGE impact on the profitability  of a franchise.  The fact that you have a royalty payment and payments into the marketing fund makes studying the expenses even more important! Make sure you understand the following two expenses, especially if you are looking at a service or retail business.

 

-   Labor Cost: This is what you pay your employees and it should be calculated as a percentage of your revenue. I think of labor cost kind of like that RPM meter in your car. If the franchisor can't explain and train you to control this cost when you are redlining, then you will probably crash and burn. Make sure you understand what the industry average is and ask existing  franchisees what THEIR labor cost percentage is.

 

-   Cost of Goods Sold: Selling retail and products can be a big boost to your bottom line, or a big drag. Your franchisor being able to train you on terms like retail turns, stock to sale ratio and spoilage are important components on your cost of good sold.

 

While many franchises provide cost information, not all do. Lowering expenses can give you a big boost in profitability - and a big boost to your confidence that you picked the right franchise!  

You have done your research and decided that buying into a franchise system is the right course of action for you and your family. Franchising is a proven business model that offers the chance to be in business for yourself - but not by yourself! But before you sign on the dotted line, let me offer you a final check list of things that may make or break your franchise:

 

*   Strong Demographics  - It sounds almost elementary, but make sure there are enough customers in your protected territory. Depending on what franchise system it is that you own, it takes a lot of customers to make a profitable location. 

 

*   Recurring Revenue  - Don't try and reinvent the wheel, or be talked into something that is not proven. Look at the top franchises over a long period of time. They almost all have one thing in common: customers that come back again and again. Franchises that have a high Customer Long Term Value (also referred to as CLV) have sustainable business models. 

 

*   Competition -  Make sure that you are bringing a new and exciting franchise business into your market. Creating the pre-opening buzz will get you off to a strong start. If there are already lots of businesses doing what you are doing in your market, then you're banking on the fact that your franchise differentiates itself enough to steal loyal customers from those other businesses. And that may be harder then you think! 

 

• * High ASI Ratio - Simply put, you want to own a franchise with a high Average Sales to Investment Ratio. The higher this ratio, the higher the return on sales. Look for a ratio of at least 2 to 1. So if Your build out cost is $200K, then this would be  $400K in revenue.  

• * High ROI - You will want a good return on investment.  If you can determine what the average Net Income is then divide that by the your investment ($50,000 Net Income/ $200,000 Cost) - this gives you a return on investment (ROI) - if this is really high, it may be that although you may have a low ASI ration - the investment is still worth it.  And Vice Verso - if the ASI is high - looking at the ROI is important as this could still be low even with a high ASI.  Normally higher return on investment means that you will need to be more involved with your business.  So when evaluating your ROI make sure and take into consideration the amount of work you the owner will have to do.

 

If you have a passion  for business, franchising is an exciting way to create income and accumulate wealth for yourself and your family.  Additionally, if your franchise has these four business metrics you should be well on your way to owning a successful business!