Restaurant franchises present different opportunities and challenges than independent restaurants. In most circumstances, the franchisee is at a disadvantage compared to the franchisor. The franchisor has done the dance many times over, entering into many franchise agreements. Also, for most things, the franchisor calls the shots. This Essential therefore is intended for first-time franchisee, discussing how to make an informed decision and the process that leads up to entering an agreement.
Unfortunately, many first-time franchisees do not understand the meaning and inflexibility of a franchise agreement, which tend to be long and complex. This is often because they have not done adequate research nor have received professional advice. There is a reason why there is mandatory 14 day cool-down period between when the franchiser issues the Franchise Disclosure Agreement, once called the Uniform.
Franchise Offering Circular (UFOC), before the franchisee can sign a contract. Many decisions franchisees came to regret were made in haste. This big commitment means you shouldn’t proceed without an accountant and a lawyer (one that you hired) explaining everything fully. Let’s be honest: some entrepreneurs were just not cut out to be franchise owners and work under the constraint of the franchise system.
So when you have reached the stage when you are ready to make a decision, you should not have any large unanswered questions. You should treat signing your name to a franchise agreement with the same seriousness that you would the decision to marry someone. Besides, normally you are on the hook for 20 years. As you may guess, a franchisee has much less flexibility and control than an independent restaurant owner (although they do have a proven brand/product), so some soul searching is necessary. Yet, franchises, although far from guaranteed successes, tend to be successful with greater reliability based on instant name recognition and a well-known product line. Franchises present a great opportunity for enjoying a profitable sector of the restaurant industry, but it is important to understand the relationship fully with your franchisor partner.
Franchises Put in Plain Language
In all the legal language and marketing materials, prospective franchisees may not understand the basic relationship is between a franchiser and a franchisee. At its simplest, the franchisor gives a licence for the franchisee to use their property (brand, products, etc.) in a controlled environment. For many if not most things, it is an exclusive arrangement, where the franchisor chooses what goes into the operations of the franchise. In exchange for the name recognition and strategic assistance, the franchisee puts up the capital and the willingness to manage the location.
The bottom line is that franchisees give up significant power for a proven brand and product. The franchisee compensates the franchisor throughout the life of the contract. After the initial franchise fee, franchisees pay royalty fees to the franchisor, sometimes based on profit, sometimes based on gross income. The franchise agreement frequently expires after a certain period of time. They are long: 20 years is the industry norm. Once completed, these contracts are not automatically renewed, nor are they likely to be the same contract if the relationship continues.
As with any agreement where interests may not be in sync, there is usually some minor conflict. The interests of a franchiser and franchisee, especially with aggressive discounting, may not align. This is why it is especially important to have a franchiser who is willing to work with franchisees, not lord over them. There is a lot of money involved, from the initial franchise fee to setting up a location, so you want to proceed cautiously and find the right match.
Choosing a Franchise
Unless your heart is set on a certain franchise (which still requires extensive research and long deliberation), it will be a complex task to compare different franchises, especially if you do not go about the process systematically. An important detail may get lost in the shuffle if you aren’t prepared for the avalanche of information. Along with organizing the paperwork, we suggest that you build a spreadsheet will centralize all the key information. The Federal Trade Commission, which regulates franchises (along with states), has helpful resources online to find the most important factors in your decision making. The FIC requires franchisors to share a Franchise Disclosure Agreement that gives you insight into the franchise. Go through it meticulously and repeatedly, ask questions, get the most up to date one before you sign.
Relationship with Franchisor
The facts and figures are not the whole story. Cooperation in franchise relationships are determined by individuals and a corporate culture. The reality is that you will have to work with and trust the franchisor and their staff. Neither party can get rid of the other easily. Therefore, you should investigate what kind of people are employed by the franchisor. You should visit their headquarters, meet any people you would be working with and talk with other franchisees about their experience. You should not hesitate in visiting a fellow franchisee (not in a neighboring territory) unannounced to get an honest perspective. Ask difficult questions, like what is their worst experience along with more general, open-ended ones. You should be able to identify a realistic, clear business strategy. What do they plan to do over the next few years, 5 years, future? Beware of franchisors that have very aggressive sales approaches. The arrangement should sell itself, and the decision making should be made without excess pressure from the franchisee. It is a long contract, a lot of rules and a big investment, so the franchisor should be respectful of that.
Future Demand and Potential Profit (Overall and Locally)
Buying a franchise involves projecting the demand into the future. Finding a franchise with current profitability goes without saying. Of course, no one can predict what will happen over 20 years, but looking at current trends can be useful.
- You want to estimate (based on research, studies and experts) the future demand of the brand and product overall.
- You want to estimate (based on research, studies and experts) if the franchisor is expanding in a way that accurately meets that demand. If they are expanding too fast, there may end up an excess supply of franchises.
- You want to estimate (based on research, studies and experts) if the demographic makeup and trends in your territory will maintain demand in the future.
- You want to evaluate if your area will be overwhelmed with an excess of competition in the future (like the building of a big mall).
- You want to look for any worrisome trends in expenses (food prices, labor costs, taxes) that may cancel out demand.
Although you should carefully look over evidence and tangible facts, do not dismiss your business intuition. Talk it out with trusted fellow businessmen and see if you are missing something right in front of your face.
Competing against another franchise location is the dread of every franchisee. It benefits the franchisor to saturate the market much more than it improves the franchisee’s situation. The only exception may be with a brand largely unrecognized in the region. Any franchisee wants to have a big buffer to ensure that they do not lose customers. The ability to expand territorially (and open more franchise locations) gives a franchisee future business opportunities. Multiple locations often provide efficiencies. Researching how the franchise handles territory issues is a must. The sticking point is that if the territory is guaranteed.
Support and Training
New franchisees will be overwhelmed without training and support assistance from the franchisor. Unless the franchisee are very familiar with franchise (like managing a location), a new franchisee will run into a lot of problems if they just receive a binder and are expected to train staff, meet design specifications, buy equipment, and find a location. The more hands on the better when it comes to getting the franchise up and operating. The worst case is being left with a binder and a prayer, only for you to make costly mistakes. The big long term question is how obligated the franchisor is to provide support services. These programs can easily fall victim to corporate cost cutting. This is where you should be contract conscious. In fact, although it is daunting, you should know the contract better than the average franchisor manager. This is not to seed interpersonal conflict but to know where your freedom ends.
The last thing to consider is the most depressing. What happens if the business does not work out? Is there a way to sell? What is the approval process and rules? No one wants to consider disaster but an inch of flexibility may pay huge dividends later on.
Is this right for you?
Franchises come in all shapes and sizes. Some are high risk and need effective marketing. Some seem to only need to be put in the right location. Franchises look deceptively like easy profit-makers. It is not simply about money as you will quickly learn if you are brutally honest with yourself. Much comes down to the prospective franchisee’s personal goals.
With franchises, an owner has to be willing to surrender part of their destiny to a franchisor…you have to be a “team player” whether you like it or not. It is just human nature that you will not make as many decisions as you would like. Over 20 years, this can be very difficult for entrepreneurs, especially in the lean times. The marriage metaphor is really useful in reflecting on this.
You have to think about if this franchise will keep you interested for 20 years. Will the passion for the product and brand wane? You will have to ask if this franchise matches your skill set and your work habits. You cannot underestimate how important the initial move is. Like an independent restaurant owner, you have to figure out if you and your family could afford the franchise failing. Equally, will you be over-reliant on the business for income? A lot of sacrifice goes into franchises too. You will have to anticipate working real hours in setting up and managing your business. You have to determine your involvement and what responsibility you will delegate.
Steps to Take
Inevitably, someone interested in buying a franchise will have to go beyond research on the internet. Of course, you can make phone calls to have your questions answered and to request materials.
The next move might be to visit a Franchise Expo. There are several including the International Franchise Expo in NYC, the West Coast Franchise Expo in the LA area and Franchise Expo South in Houston. There are also events from the National Franchise and Business Opportunity shows. At one of these, you will see a variety of franchises and be able to compare. It is a place to make connections and to see what they are offering. Unlike directly contacting the company, you will probably only meet their franchise marketing team and not the people you will interact with from the franchisor. But it is a good start. It will be an excellent opportunity to size up different franchises and how they present themselves. Of course, you should bear in mind that the best sales force does not make the best franchise.
The second way is more treacherous. You can go to a franchise broker. The problem is that franchise brokers are paid by the franchises that they direct you to. You have to take everything they say with a grain of salt. But still they may inform you of opportunities you have not heard of. Why some franchises are better than others is something you should decide for yourself. Make sure any advice you get is backed by evidence.
Determined analytical skills and a healthy sense of realism are attributes of successful franchisee. This applies to the initial decisions to become a franchisee as much as it does when the franchise is up and running. For those who have the patience, work ethic and business intuition, it can end with a stable profitable business.