This year I’ve reviewed so many franchise disclosure documents for prospective franchisees that I’ve lost count. No matter the industry, it seems as though I am always discussing the same things with franchisees, whether they are interested in fitness, restaurants, business services or tech. So here are 11 things I’d like every franchisee to know when they are considering a franchise opportunity:
- A franchise must have a strong brand or a great system (preferably both). Many prospective franchisees consider brands no one knows about. If so, that brand better have a product or system that knocks your socks off because you’re going to need to promote it just like you started up your own new independent business. Buying a well-known brand is usally better because the franchise name recognition is often so critical to success. Without a strong brand name or a great system, what are you buying?
- Be willing to walk away from the deal. In my experience, franchisees who are willing to walk away, get the best deals. They are the ones who get concessions in fees, territorial protections and other terms in the franchise agreement. It’s like buying a new car, if you’re willing to walk away, the sales person will usually stop you with a better offer.
- If it isn’t in writing, the franchisor isn’t going to do it. Many franchisees tell me that a franchisor told them ‘this’ or the franchisor told them ‘that’. If ‘this’ or ‘that’ isn’t in the franchise agreement, you can be rest assured the franchisor will not live up to their end of the bargain. You can take that to the bank.
- Trademark indemnification is necessary. Are you really going to invest your life savings in an opportunity when the franchisor won’t even stand by their brand and trademark by defending you if someone sues you for using the FRANCHISOR’s trademark? In my opinion franchisors should be legally required to defend franchisees for the use of the franchisor’s trademark. After all, the marks are the heart of the franchise. Most franchisors I’ve dealt with will make this concession in their franchise agreement but it still amazes me when it’s not addressed up front in a franchise agreement.
- Determine if franchising is right for you up front. Some people are not rule followers. These people will not make good franchisees. If you want to chart your own course with a business, don’t become a franchisee.
- Interview as many current and former franchisees as possible. If you aren’t willing to take the time to call current and former franchisees, you probably get what you deserve if the franchise opportunity goes wrong.
- Avoid personal guarantees for your spouse. Most franchisors will require a personal guarantee from you. However, there is no reason to throw all your eggs in one basket by having your spouse sign a personal guarantee too.
- Bargain with new franchisors. I am leery of people investing their life savings in a new franchisor but I realize it is sometimes a great opportunity to get on the ground floor of a franchise. But remember that most new franchisors NEED to sell franchisees. This means you may have greater bargaining power to get a better deal.
- Franchise agreements are negotiable. Franchise agreements are negotiable even if the franchisor says they’re not. Do not be afraid to negotiate. A franchisor that gets upset with you because you try to negotiate is not the right franchisor for you. It’s not personal, it’s just business.
- Mutliple Unit Franchising has the most risk but offers the most reward. In my view, owning multiple units allows you to harness the true power of franchising. The franchisees I see who are the most successful are all multi-unit owners. However, this usually requires a substantial investment and should not be considered unless you have sufficient capital. But owning one franchise unit of system is unlikely to ever make you wealthy and often you are just buying yourself a job.
- Franchise businesses fail at roughly the same rate as other businesses. Over the past few years I’ve seen many franchisees you could not make it for one reason or another. Don’t fall for the trap that franchise businesses are less likely to fail. It couldn’t be further from the truth.
Don’t trust your franchise selection to luck. Do your homework and carefully consider all your options before making a substantial investment in a franchise.