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I posted on this a couple of years ago but I consistently see people who invest their life savings tinto franchise operations. Some of these people achieve great results but many (perhaps even a majority) do not. What separates the good from the bad?
One critical aspect to consider in my view is the brand itself. Is the brand recognizable? If not, the franchise better have a fantastic system, unique concept or protected intellectual property. Otherwise, I think you need to question up front whether the franchise is right for you.
There is no also validity to the claim that franchise operations are less likely to fail than non-franchise operations. The truth is that franchisees fail at a rate that is similar to non-franchise businesses. In fact, the International Franchising Association has discouraged all franchisors from making such claims. 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, especially in today’s economy. Many franchisors are willing to make a deal these days. Don’t get in a hurry in your negotiations. You may be able to secure important concessions if you are patient.