I love the product should I invest in the franchise?
I get calls from prospective franchisees that say to me “Jim, I’m interested in this franchise because I love the product. I think its great†I guess that is as good as any reason to investigate the franchise opportunity but not a good enough reason to invest even on Valentines day.
For franchising to be successful it needs to have a mutually beneficial relationship for all parties involved. This is much easier said than done. Just because they have a good product or service doesn’t mean the franchise will succeed.
If the franchise is set-up in a way that favors one of the parties more than the other than the franchise system is setting itself up to languish or fail.
While there are many examples of successful franchises, buying a franchise business is no guarantee of success. Each year there are failures, both on the part of franchisors and franchisees.
Before you invest in a franchise, important questions need to be carefully and thoughtfully answered:
Are you willing and able to take on the responsibilities of managing your own business? You must be willing to work harder than you have perhaps ever worked before.
Will you enjoy the franchise? Determine your interests and types of business activities you might really enjoy.
Are you willing to completely follow the franchisor’s system? People who are extremely entrepreneurial in the sense that they do not like to conform to a predetermined formula should be very careful about buying a franchise. If you have a tough time following direction than you will have a tough time as a franchisee.
Can you afford the franchise? One of the major causes of business failure is under capitalization. Remember, it is better to start out with more money than you think you will need rather than less. You also need backup to support yourself and your family while you build the business.
Have you carefully studied the legal documents? Franchisors are required to prepare a document called the Uniform Franchise Offering Circular (UFOC). This document will give you pertinent information about the franchise. It should be studied very carefully and discussed with your business advisors, lawyer and accountant.
Does the business model work? The business model has to deliver value to all parties involved. This is one of the key factors in a successful franchise system. If the business model delivers profits to the franchisor, franchisee and value to the consumer, a mutually advantageous relationship is created and a franchise system will grow and grow.
Does the franchise you are considering have a track record of success? You should get to know the principal directors of the company, their business background and how profitable their franchise has been.
Are the franchisees successful? It would be worth your time to contact a number of existing franchisees to discuss their experiences with the franchise. Spend time in the locations and get comfortable with the business.
Do you like the people with whom you will be working? One of the most important elements of a franchise is the ongoing support and contact you will have with the franchisor.
Do you have family support? Managing a franchise is a full time job. It requires great sacrifices of personal and family time.
Buying a franchise business is not a 100% guarantee of success. By carefully evaluating yourself and the franchise business you desire to purchase, the risks are minimized and the chances of success become greater.
[cross-posted at Let’s Talk Franchising]
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I would suggest that all of these questions are of a secondary nature. The only relevant business question is:
Is this franchise offering likely to yield a return on my capital and effort that is in keeping with the risks?
Franchised businesses have a much different risk profile than do independent businesses. These risks are manifested during and after the relationship via franchisor opportunism [ability to strip franchise investor value with deceit].
Evaluating a franchise offering is FIRST an exercise in understanding BUSINESS RISK. If this one question cannot be answered, the rest are irrelevant in a business administration sense.
Franchising can be structured to be little more than a way of appropriating a new franchisee’s life savings under the guise of renting a business.
Les Stewart, MBA
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Thanks for your comments.
No doubt there are risky franchise opportunities. Calculating risk/reward is an important exercise for everyone to consider in franchising. Interesting though, risk minimization is a prime reason so many people consider franchising in the first place, yet very often risk/reward isn’t even considered.
Franchising opportunities are not all the same. There are good, bad, and ugly ones. There are ones that are good for one person and bad for another. The ugly ones are usually ugly for everyone.
Franchising is a complicated mechanism, no doubt about it. My experience tells me that for franchising to be successful it MUST BE BENEFICAL for all parties involved.
When a franchise system has truly developed a mutually beneficial relationship then all parties share in the rewards mutually.
Many franchise systems are developed with the franchisor controlling too much of the reward and too little of the risk. The more lopsided the relationship is the more likely the doom.
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These are top:
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Can you afford the franchise? One of the major causes of business failure is under capitalization. Remember, it is better to start out with more money than you think you will need rather than less. You also need backup to support yourself and your family while you build the business.
Have you carefully studied the legal documents? Franchisors are required to prepare a document called the Uniform Franchise Offering Circular (UFOC). This document will give you pertinent information about the franchise. It should be studied very carefully and discussed with your business advisors, lawyer and accountant.
Does the business model work? The business model has to deliver value to all parties involved. This is one of the key factors in a successful franchise system. If the business model delivers profits to the franchisor, franchisee and value to the consumer, a mutually advantageous relationship is created and a franchise system will grow and grow.
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One very important question which is not mentioned is “can you be a good franchisee??”
Franchise owners are NOT entrepreneurs, they are managers. The biggest cause of franchise failure is that the franchisee did NOT follow the system….
A prospective franchise buyers has to make sure he/she will be able to follow the system.
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Nick,
Following the system, is important. But to state that “the biggest cause of franchise failure is that the franchisee did not follow the system…” is taking that concept a little too far. Where is the data that shows that statistic? What is your definition of failure?
If a franchise unit is failing because of the franchisee is not following the system, that franchise unit can be transfered to another franchisee, the franchisor wouldn’t consider that a failure just a transfer.
There are many reasons for failure. I’ve seen whole franchise systems fail because the business model was a failure to begin with. In other words the franchisees were following a system destined to fail.
In my experience franchising is a team effort. Success and failure is a result of the efforts of the entire team.
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Does anyone have info on Liberty Tax Service. I am interested in purchasing a franchise and have begun extensive research, calling other franchise owners, etc… So far, have not heard or found any negetives except maybe that you need 1 or 2 tax seasons to make a profit (which I understand is typical in any business). Any stories or articles or knowledge on failures, problems, etc… This Liberty Tax was started 9 years ago by John Hewitt (founder of Jackson Hewitt; sold that business in 10 years ago for 500 million) and they already have 2000 franchises nationwide. Only 5 in my city so far and we are heavily populated so I see a good future for this business here.
Any info would be most appreciated!
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Lisa wrote on May 8, 2007 @ 10:11 am:
no one will tell you what a horrible system this is as all franchisees signed a contract saying they wouldn’t talk about liberty otherwise they would get sued. its better to shoot yourself in the head rather than buy one of these things. and no i don’t work for jackson hewitt or hrblock
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