Steps in Purchasing a Franchise

Purchasing  a  franchise  system  is  a  seven-step  process,  as  illustrated  in Figure 15.3. The first rule of buying a franchise is to avoid making a hasty de- cision. Again, owning a franchise is typically costly and labor-intensive, and the purchase of a franchise should be a careful, deliberate decision. Once the decision to purchase a franchise has been nearly made, however, the following steps should be taken. If at any time prior to signing the franchise agreement the prospective franchisee has second thoughts, the process should be stopped until the prospective franchisee’s concerns are adequately addressed.

Step 1 Visit several of the franchisor’s outlets: Prior to meeting with the franchisor, the prospective franchisee should visit several of the fran- chisor’s outlets and talk with their owners and employees. During the visits, the prospective franchisee should continually ask, “Is this the type of business I would enjoy owning and operating or managing?”

Step 2 Meet with a  franchise  attorney: Prospective franchisees should have an attorney who represents their interests, not the franchisor’s. The attorney should prepare the prospective franchisee for meeting with the franchisor and should review all franchise documents before they are signed. If the franchisor tries to discourage the prospective franchisee from retaining an attorney, this is a red flag.

Step 3 Meet with the franchisor and check the franchisor’s references: The prospective franchisee should meet with the franchisor, preferably at the franchisor’s headquarters. During the meeting, the prospec- tive franchisee should compare what was observed firsthand in the franchised outlets with what the franchisor is saying. Additional refer- ences should also be checked. The Franchise Disclosure Document is a good source for references. In section 20 of this document, there is a list of all the franchisees that have dropped out of the system in the past three years along with their contact information. Several of these should be called. Although it may seem to be overkill, the mantra for prospective franchisees is to check, double-check, and triple-check a franchisor’s references.

Step 4 Review all franchise documents with the attorney: The franchise attorney should review all the franchise documents, including the Franchise Disclosure Document and the franchise agreement.

Step 5 Sign the franchise agreement: If everything is a go at this point, the franchise agreement can be signed. The franchise agreement is the document in which the provisions of the franchisor–franchisee rela- tionship are outlined. We discuss this agreement in greater detail later in this chapter.

Step 6 Attend training: Almost all franchise organizations provide training for their franchisees. For example, Comfort Keepers requires each of its new franchisees to attend Comfort Keeper’s Academy, the company’s training center, for 40 hours of training before they open their Comfort Keepers franchise.

Step 7 Open the franchise  business:  For many franchises, particularly restaurants, the first two to three weeks after the business is opened may be its busiest period, as prospective customers “try it out.” This is why many franchise organizations send experienced personnel to help the franchisee open the business as smoothly as possible. One goal of a franchisee is generating positive word of mouth about the business right from the start.

2. Watch out! Common Misconceptions about Franchising

Despite the abundance of advice available to them, many franchisees make false assumptions about franchising. Part of the explanation for this is that franchising has an attractive lure. It is easy to become enthralled with the promise of franchising and not spend an adequate amount of time examining the potential pitfalls. The following is a list of misconceptions franchisees often have about franchising:

■ Franchising is a safe investment: Franchising, in and of itself, is no safer as an investment than is any other form of business ownership.

■ A strong industry ensures franchise success: Although it is generally important to operate in a growing industry, the strength of an indus-try does not make up for a poor product, a poor business model, poor management, or inappropriate advertising. There are many firms that fail in growing industries just as there are firms that succeed in unat- tractive ones.

■ A franchise is a “proven” business system: A franchisor sells a fran- chisee the right to use a particular business model. Whether the model is proven or not is subject to the test of time. Obviously, companies such as Subway, Papa John’s Pizza, and H&R Block are using models that are polished and that have worked well over time. Most prospective franchi- sees, however, cannot afford a Papa John’s Pizza or a Subway unit and will be considering a lesser-known franchise. All too frequently, companies start selling franchises before their systems are anywhere close to being proven—a fact that should cause entrepreneurs to be wary.

■ There is no need to hire a franchise attorney or an accountant: Professional advice is almost always needed to guide a prospective fran- chisee through the franchise purchase process. A prospective franchisee should never give in to the temptation to save money by relying solely on the franchisor’s advice.

■ The best systems grow rapidly, and it is best to be a part of a rapid- growth system: While some franchise systems grow rapidly because they have a good trademark and a polished business model, other franchise sys- tems grow quickly because their major emphasis is on selling franchises. It is to a franchisee’s benefit to be part of a system that has a solid trademark and business system—as that trademark and system will attract more customers—but some franchise systems grow so quickly that they outrun their ability to provide their franchisees adequate support.

■ I can operate my franchise outlet for less than the franchisor predicts: The operation of a franchise outlet usually costs just as much as the fran- chisor predicts.

■ The franchisor is a nice person—he’ll help me out if I need it: Although it may be human nature to rely on the goodwill of others, don’t expect any- thing from your franchisor that isn’t spelled out in the franchise agreement.

Because these misconceptions are often hard to detect, some prospective franchisees attend seminars or franchise “boot camps” that teach them the ins and outs of franchising, including the things to watch out for when they talk to prospective franchisors. These types of seminars and boot camps are regularly of- fered by organizations such as Women in Franchising, the United States Hispanic Chamber of Commerce, and the International Franchising Organization.

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.