Many of you may have seen a show on TV called Shark Tank. If you haven't, entrepreneurs attempt to convince 6 highly successful business people as to why they should invest their money in the next great business idea. Most businesses start this way and unfortunately it's probably one of the biggest reasons for business failure! 

Many people start their search for a franchise without measuring the most important thing: are there customers for the franchise? More importantly - and don't miss this - is doing what you are doing so PAINFUL (so-to-speak) for the customer to do themselves, that they have to come to you?  In business we call this the Shark Bite (no correlation to the Shark Tank). If your customer can do it themselves or go to you, well that may be like a mosquito bite - and it may be a nuisance that they are willing to live with. However if the customer's pain feels something like a shark bite, then customers will be eager to pay you to ease their pain!  

Great businesses and franchises begin by solving a customer problem. This is why it's so important to try and figure out if the franchise that you are buying solves the pain your customers are feeling. For example, take our Shear Madness Haircuts for Kids salon franchise. I know that many of you reading this may be parents, and let's be honest...have you ever tried to cut your two year old's hair? Trust me, it's a shark bite, and our customers are more then happy to have one of our award winning stylist ease their pain vs. trying to do it on their own. And with our TVs and Xbox games at every station to help provide a positive distraction for their children, they end up coming back for years!

So before you select a franchise, focus on the BIG pain point. Remember that any big problem is a big opportunity, and customers will be more then happy to pay you to ease their pain.

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!