Nothing like a good article on franchising to bring me out of a blogging hiatus that I anticipated would last at least another week.  But thanks to the Small Business Trends site and franchise consultant Joel Libava, my rest is over.

The Franchise King posted on a Central Ohio restaurant franchise called Roosters that seeks experienced franchise operators rather than newbies that might not understand the industry.  Like Joel, I agree it’s a good concept for a franchisor to target franchisees that have experience in the industry.  Experienced operators are much more likely to be successful.  We agree on that.  We actually couldn’t agree more on that.

However, Joel doesn’t carry that logic forward when it comes to working in a franchise before buying one.  Joel says he is often asked this common question:

“Joel, are there any franchise companies out there that will let me work with a local franchisee, to see if I like the business?” 

And being the laid back guy he is (now don’t get me wrong, Joel is a well-intentioned guy who wrote a book on Franchise Research Steps), Joel responds with an emphatic "No!"  He doesn’t recommend it because the franchisee won’t get the full story.  After all, they don’t have any "skin in the game, so how could they possibly understand what the franchise business owner is going through?  He more or less says that if you aren’t willing to go "all in" from the outset perhaps you should take it as a sign that you shouldn’t go into business for yourself.  (Unfortunately too few people will heed this advice in my experience and take it as a personal challenge to go forward).

So it’s my view working in a franchise business BEFORE buying doesn’t make you a chicken!  In fact, it may be the best due diligence any prospective franchisee could do.  It’s the same reason why so many successful business owners were once employees of the business they ended up buying.  It’s the same reason a successful franchise owner I know worked in retail for a year before buying a retail franchise.  She wanted the experience.  No, she NEEDED the experience before investing much of her life savings.    

Now, it’s true that some prospective franchisees might not benefit from the experience.  Some prospective franchisees have no business ever owning a franchise or any other kind of business.  But to say all prospective franchisees shouldn’t avail themselves of the opportunity to work in a franchise system seems a bit bold in my opinion.  As a franchisee and reader of this blog pointed out:

The most difficult information to obtain and verify is franchisee profitability.  The profitability of the franchisor and the franchisees is not always related.  Sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

Risk is inherent in any business venture.  You are taking a chance and a leap of faith.  But actually working in a franchise business before you buy may allow you to find out whether you want to stake your life savings on the opportunity.  Taking a chance with maximum information is not random chance but a calculated risk – and that could make all the difference.

photo on flickr by ™bluhousworker and original photo by TedSher

 

When searching my feed reader last night I ran into this distressful thread on BlueMauMau.org, a pro-franchisee Web site.  In the comments below the initial post, franchise lawyer Richard Solomon says he is giving up on trying to help franchisees.  Richard says,

I’m about ready to climb down off the due diligence cross and go do something less stressful, like crisis management counseling. In crisis management, people really do want help and are willing to provide a budget for it.

I’ll admit it.  There have been times where I have felt the same way as Richard when trying to assist franchisees in reviewing their franchise agreement and conducting due diligence.  There are times when a franchisee is going to do the deal come hell or high water.  But at this point I am not willing to stop trying to help these people. 

I think Richard’s point is simple.  Isn’t it unbelievable that people would be willing to invest their life savings in a franchise business but refuse to spend a little time and small expense to properly conduct due diligence?

The purpose of a franchise agreement and disclosure document review is not for the lawyer to talk the client out of their franchise business opportunity.  An appropriate review will help point out the legal and business risks and possible areas of negotiation.  After the review, the client must still  make their own decision about whether to proceed forward.  I have been told by more than one client that a review opened their eyes to help them better understand the franchise opportunity.  Some moved forward while others backed away from their deal.

I have been very fortunate to work with prospective franchisees that are serious about their due diligence.   Recently I had a prospective franchisee client that encountered all the classic warning signs from a franchisor.  I know this client felt disappointed the deal didn’t go through but I was sure proud they were willing to walk away.  Only someone serious about their business would have done so.   

So don’t give up Richard (and other franchisee lawyers).  It takes just one client to make you see this is all worthwhile and they definitely need our help.

 

If you are looking at a franchise opportunity perhaps you should beware if your prospective franchisor says the following:

  1. You don’t need a lawyer to review the agreement. 
  2. I would prefer you don’t talk with the other franchisees.  You should only talk with me.
  3. We won’t negotiate any terms.
  4. Trust us, we can’t (and won’t) change the agreement but we won’t really hold you to that provision anyway.

Like many people you may be considering an investment of your retirement savings in a franchise.  You owe it to yourself to do the best job possible investigating that franchise and performing the most due diligence possible.  That includes hiring franchisee counsel to review the franchise agreement and disclosure document and talking with as many franchisees as possible.  Some franchisors won’t negotiate but many will consider your needs.  And never, I mean NEVER, believe the franchisor that tells you they won’t hold you to the terms of their written agreement.  You can be assured that the franchisor’s lawyer in any lawsuit will never acknowledge that statement was ever made and most franchise agreements are written so that any such statement could not be used as evidence anyway.

Trust your gut.  Don’t believe the hype.  Be willing to walk.

photo on flickr by Picture Perfect Pose.

I ran across this informative article on whether you should hire a franchise broker to purchase a franchise via the Indiana Civil & Business Lawyer Blog

The article discusses how the Internet has changed the way people find a franchise.  With all the information available on the Internet it has produced "information overload" for prospective franchisees.  The Internet has paved the way for trusted intermediaries to sort through the morass.

The controversy is whether franchise brokers are trusted intermediaries.  As mentioned in the article it is important to remember that the franchise broker is not necessarily independent.  The brokers are paid a fee typically only if the sale is successful and brokers themselves usually do not represent all franchise opportunities.  Varying fees among franchises may encourage a broker to steer a prospective franchisee to one opportunity over another.

Other the other hand, I have had the good fortune to work with franchise brokers like Joe Cooney who are professionals and attempt to give objective information to prospective franchisees.  Professional franchise brokers will encourage you to conduct appropriate due diligence.  Professional franchise brokers will put your interests above their own.  Their long-term livelihood depends on that.  Not the one time sale. 

But nonetheless do your homework just like you would for any professional whether it be a business lawyer, accountant, real estate agent, financial representative, business broker, etc. 

This past week I had the opportunity to attend the ABA’s Forum on Franchising.  What a great event!  First and foremost, it was an opportunity to network with some of the best franchise lawyers in America.   Second, I really enjoyed hanging out with fellow Iowa franchise lawyers, Matt Krigbaum of Cedar Rapids and David Bright of Iowa City.  These guys are excellent lawyers and terrific individuals.  If you are Eastern Iowa I recommend you talk with them regarding your franchising questions.

The initial seminar session I attended was the Fundamentals on Franchising.  Some top-notch franchise lawyers spoke during this 4 1/2 hour session but of particular interest to me was the talk by Ron Gardner of the Dady and Garner Law Firm in Minneapolis.   The law firm is regarded as one of the best firms in the country representing franchisees in disputes with franchisors.  In my franchise law work I counsel and negotiate on behalf of franchisees so the talk was very informative.

Some highlights of Gardner’s talk:

  1. If a franchisor is making certain promises you should attempt to have those promises included in the franchise agreement.  Often a franchisor will say certain things to entice a franchisee to enter into the franchise agreement.  But when you read the agreement these promises are no where to be found.  Get those promises in writing.  If not, you should have no expectation the franchisor will follow through on its promises.
  2. Franchisees and their lawyers must communicate together on much more than just the franchise disclosure document or the franchise agreement.  In order to advise you properly it is important to know your background, your needs and your expectations.  Without this information it is often difficult to know what it important for you in a negotiation and what is not. 
  3. Run Away from Franchisors that Won’t Negotiate.  Some franchisors will tell you that they won’t negotiate their agreements, or worse, tell you the laws and regulations do not allow them to negotiate their agreements.  Tell them to take a long walk off a short dock!  Ask youself whether you want to be in business with a franchisor that will not consider your busines goals and needs.  Fortunately, my experience has been that many franchisors will negotiate at least certain key terms and conditions.
  4. Key Disclosure Issues.  Key disclosure issues generally include litigation, initial investment, vendor rebates, earnings, outlets and financial statements.  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.  As I have preached franchise due diligence must include interviews of franchisees, including those that have left the system, in order to get a full picture of the franchise system.
  5. Be Willing to Walk AwayI have touched on this before.  This is the paradox of negotiation.  You should not fall in love with the deal.  Prospective franchisees who are willing to walk away usually get much more from those who have decided to sign at all costs. 

More to follow on other aspects of franchising in other posts this week.

 

In the never ending search for objective franchise information  I discovered Blue MauMau.  The site is a franchisee community designed to share insight, comments and stories about buying and running a franchise.

A few of recent blog entries worth reading are:

If you are considering a franchise it is important to research and conduct due diligence about the franchise system.  The notion that franchised businesses cannot fail is false.  Not everyone is cut out for owning their own business and not everyone is cut out for franchising.  Here are two suggestions if you are considering a franchise:

  1. Talk with as many franchisees as possible in your due diligence.  Ask probing questions to get an accurate picture of the franchise and the prospects for success.  You will learn both from the positive and negative comments. 
  2. Consider working in the franchise system for six months to a year before purchasing the franchise.  There is no substitute for working in the system before purchasing the franchise.  Don’t think you can afford to do this?  Perhaps you should consider whether you can afford NOT to do this.

From Mike Colwell of Biz I learned about Franchise Interviews which is another resource for those interesting in franchising.  The site has several interviews with successful franchisees, franchisors and franchise experts (including lawyers).

I listened to the interview with leading franchise lawyer Kevin Hein of the Denver office of Snell & Wilmer. ( An interesting interview but the actual interview does not begin until 24 minutes into the 1 hour program).  Hein shared insight on what is necessary for a successful franchise concept.  His four points:

  1. Unit economics – How much can individual franchisees make?  Will it generate revenue to cover expenses, pay a reasonable salary and give a return on investment?
  2. Reasonable Demand for the Product – sometimes franchises may have unique niche, yet no significant demand.  A franchise must have real interest.
  3. An easily replicated system – The more detailed the system the harder it will be to replicate.  Are you able to give the same customer experience no matter the market or region.  
  4. Unique marketing proposition – How do you stand out? 

Later in the program Hein struck a chord with me when he warned about franchisees "buying themselves a job".  I have noticed that many franchisees do not carefully consider whether they will receive a return on investment when purchasing a franchise.  Obtaining a return on your investment may be difficult with many franchise concepts – so be sure to analyze potential revenue and conduct your due diligence.

P.S.  Another resource to check out is Seeds of Growth which is where Mike spotted the link to Franchise Interviews.  It features some great posts to help your business grow.

 

blog radio

Rush on Business Podcast No. 4 is an interview with Joe Cooney of Frannet.  Joe is a franchise coach in the Iowa / Nebraska region.  Joe and I discussed several basics of buying a franchise including:

  1. What is the franchising model of business?
  2. What different types of franchises are available?
  3. What do franchises cost?
  4. What options are available for financing?
  5. How do you lay the groundwork for success?
  6. What to look for in a franchisor?
  7. How do you research franchises to find the right one for you?

Joe also provided information on a Web site service (www.fransurvey.com) where prospective franchisees download reports with information on what actual franchisees say about their franchisors.  The site looks helpful but it is still no substitute for contacting franchisees on your own when performing due diligence.  I am sure Joe would agree!

For more information or if you have questions on franchise opportunities available through Frannet, Joe Cooney can be reached at (402) 330-7306.

To listen to the podcast, click below.  (It’s free!)

Buying a Franchise Basics – BlogTalkRadio Podcast

When reviewing the franchise agreement a prospective franchisee should pay careful attention to the territorial provisions contained in the agreement.  It is important to protect yourself from territorial encroachment and competition from both the franchisor and other franchisees.

Territorial encroachment is a frequent complaint from franchisees.  Usually this involves the franchisor granting a new franchisee a territory “too close” to an existing franchisee.  Sometimes it involves an affiliate of the franchisor placing an affiliated franchise (selling similar products) too close to the existing franchisee.  Unless the franchise agreement creates express protection for the franchisee’s defined territory, a court may be reluctant to find a franchisor encroached on the franchisee’s territory.

Be sure to review the territory provisions of the franchise agreement to make sure you have a protected territory.  The Iowa Franchise Act does provide some protections against encroachment.  The downside is that while these protections may help you in litigation the damage may already have been done when you get to that point.  Moreover, there never any guarantees of success in litigation.  Be proactive and discuss the territory provisions up front with the franchisor during the due diligence process.

In its January issue, Entrepreneur Magazine published its Annual Franchise 500 for 2007.  One of the more interesting articles in the issue had to do with conducting due diligence.  As I recommended in a previous post the article discussed the importance of interviewing as many franchisees as possible in order to gain information about the franchisor.  Unfortunately most prospective franchisees do not conduct even basic due diligence, the article says.  Here are highlights of the article:

If you want to know more than the splashy brochures and franchise salespeople will tell you, then roll up your sleeves.  You can use a variety of methods to dig deeper and get the real lowdown on a franchisor.  The good news:  Most of these techniques are cheap or free.

1.  Mine Franchisees:  Be sure to ask tough questions.  Don’t just shoot the breeze.  Also visit franchisees at their stores.  You get more information and it is an opportunity to see the franchise in operation.

2.  Dig in the UFOC:  The UFOC lists a great deal of information but many franchisees do not even give it a glance.  The UFOC will contain information about lawsuits, revenues and management.

3.  Ramp Up Research:  Search the Internet.  Are there any gripe sites?  See UPS Store www.thebrownboard.com and Quiznos www.toastedsubs.info as examples of gripe sites.  Be sure to take what you read on the Internet with a grain of salt and verify what you learn.

4.  Meet the Management.  Ask the tough questions of management as well.  One expert recommended that you ask the franchisor whether they will let you out of their franchise agreement if you are unhappy?  If they respond "Yes", they are lying and will say anthing to get you to sign.  (Franchise agreements are enforceable contracts and I have yet to deal with a franchisor that will let you out of an agreement voluntarily).

5.  Know the Market.  Do the market research and understand how the franchise fits into the competitive picture.  Also, think about how the market is going to change. 

6.  Get Advice.  The article advises to go to SCORE, have an accountant review the franchisor’s financials and have an attorney review the franchise UFOC and franchise agreement.

Update:  I received an email today from a franchisee regarding this post.  He pointed out that the most difficult  information to obtain and verify is franchisee profitability.  He pointed out that the profitability of the franchisor and the franchisees is not always related.  He correctly stated that sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

Forbes Magazine had an interesting article that provides Ten Good Reasons Not to Buy a Franchise.  Number 1 on the list is Questionable Profitability.  That makes extensive due diligence all the more important if you are considering a franchise purchase.