With the recent economic downturn, layoffs have begun to occur. A potential option for many former corporate employees is franchise ownership. While franchising does offer many advantages it is critical to approach a franchise opportunity just as you should any other business opportunity – with caution.
It is a misnomer that franchises are more likely to succeed than other businesses. In fact, the International Franchising Association has discouraged all franchisors from making such claims. The truth is that franchises fail at a rate that is similar to non-franchised business. So careful due diligence is important when considering a franchise opportunity. One of the best things you can do is talk to as many existing (and former) franchisees as possible. Also, consider several key disclosure issues including:
- Franchisor’s litigation history;
- Amount of the initial investment;
- Vendor rebates and products you must buy from the franchisor;
- Earnings claims made by the franchisor;
- Franchisor’s financial statements;
- Trends concerning the number of outlets. It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures. A high number of transfers may be an indication that franchisees in the system are struggling, but bad stores have not been shut down.
And finally, be willing to walk away. This is the paradox of successful negotiation. Those that are willing to walk away usually find they get more in negotiation.
For more on franchise due diligence be sure to visit the Federal Trade Commission’s Consumer Guide for Buying a Franchise.