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Playing the Right Tune

General Business News

November 2001

Playing the Right Tune

Last month we ended our article with a musical theme in our article titled "And the Band Played On.” We discussed some of the advantages and risks that go with starting life as a franchisee. This month, we’re continuing that theme and will discuss the steps you should take in finding the right franchise, or tune, for you.

Once you’re comfortable that you really do want to go into business on your own, and you’re certain you have the temperament to do so, it’s now time to decide what business you really want to start. As we said last month, you have a choice to either start a completely new concept or become a franchisee of an already established business. Becoming a franchisee has several advantages, but how do you go about finding a franchise that’s right for you?

First, decide what types of businesses you have a strong interest in. Ideally, something that matches your work experiences. This doesn't necessarily mean the same industry you’ve been employed in previously. However, a good fit for you would probably include a business that would utilize your past experiences without forcing you to become familiar with a whole new set of business principles. For example, it would be helpful if you’ve had experience managing large amounts of inventory if you plan to start a furniture store.

The business you enter will also need to be one that interests you and matches your lifestyle. If you hate getting up at 4:00 am, don't start a donut shop. If you hate fishing, a bait and tackle shop probably isn't for you.

With these two parameters, you can start your search. One source of information on available franchises is the International Franchise Association. Another is any number of consultants whose mission is to match your interests with the right franchise company.

When you’ve narrowed your choices, the real work begins with an initial contact with the franchisor. This will be either a telephone conversation or a letter of inquiry asking for general information. Typically, you’ll receive an information package with overview information on the company. In return, the franchisor will ask you for additional information to see if you meet their requirements.

If you and the franchisor decide to continue the investigation, the next step is to receive
and examine the Uniform Franchise Offering Circular. This is a document commonly called a UFOC. It provides detailed information on a variety of important issues, including:

  • The history of the company, its officers and directors.

  • Complete description of the business.

  • All costs and fees associated with the franchise agreement.

  • Obligations of both parties under the franchise agreement.

  • Any litigation involving the company.

  • Business failures, transfers of ownership and other adverse information
    indicating the success rate of other franchise units in the company.

  • Audited financial statements of the company for the prior three years.

  • A list of existing franchises.

  • Complete copy of the actual franchise agreement. However, some franchisors
    include this under separate cover.

  • Sometimes, franchisors will include earnings claims, but are under no obligation
    to do so.

Based on a review of the UFOC, you’ll now be in a position to talk to existing franchisees. There’s no better way of getting the inside scoop on a company than visiting its existing franchisees.

While it’s likely that you’ll find most of the franchisees are satisfied with their relationships, you should try to find those who are unhappy. When you do, listen carefully to each complaint. Try to determine if their experience is typical or atypical. Compare their temperament and style is consistent with that of the other franchisees you talk with. This will allow you to decide how likely you are to encounter similar problems in the franchise.

We suggest your discussion include the following points:

  • The nature and extent of training programs offered by the franchisor with
    an emphasis on whether the programs really prepare you for opening the business
    and keeping it running.

  • The extent to which the franchisor helps the opening effort. How much assistance,
    if any, does the franchisor offer in the area of pre-opening advertising,
    store design, financing and similar opening issues.

  • Does the franchisor provide sufficient ongoing support? Do the services
    offered help in managing the day-to-day business of the franchise?

  • What marketing programs are typically available and how effective they are.

  • Whether or not the franchisor uses the group buying power of all its stores
    in negotiating supplies and inventory purchasing agreements.

  • Whether franchisor/franchisee relations are typically positive or neutral.
    Will the franchisor make a good ongoing partner or a continuing hassle?

  • What range of investment will be required? While the UFOC provides information
    in this area, it’s important to find out exactly what other franchisees
    have experienced.

  • What earnings other franchisees have experienced.

After having spoken with current franchisees and reviewed the documentation of the franchisors systems and procedures, it’s time to meet with company representatives. Face-to-face meetings with key company officials are critical in determining whether you’ll be able to have a successful relationship. Meet with those people you’ll be dealing with directly during the start up and operational phases. It's not very comforting to know the company's CEO is a great person if the people you deal with on a day-to-day basis are unfriendly and uncooperative.

Assuming you’ve done all of your homework and properly identified the key factors in moving ahead, you should be in a position to decide your next move. If the company is a good fit for you and your community, chances are, you’ll want to move ahead with a deal. If not, chalk the time spent up to experience and move on to the next candidate. Never go into business with a company that you do not feel completely comfortable with. Remember, this will likely be the biggest investment of your life.

The choice to go into business for yourself is difficult. Choosing your business partners is even harder and not one to be made lightly. The choices to be made are both personal and financial. We can help you with the financial decisions by careful analysis of your current condition, aiding you in developing business plans, helping you find financing and assist you in establishing ongoing financial management systems. Before you take what will probably be one of the greatest investments of your life, give us a call. Let us help you make sure the tune you have found will be right for you.

Have a great November and a happy Thanksgiving!

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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