Analyzing A Franchise
Much of the information you'll need to gather in order toanalyze a franchise will be acquired through the following:
*Interviews with the franchisor
*Interviews with existing franchisees
*Examination of the Uniform Franchise Offering Circular(UFOC)
*Examination of the franchise agreement
*Examination of the audited financial statements
*An earnings-claim statement or sample unit income(profit-and-loss) statement
*Trade-area surveys
*Organizational charts
*List of current franchisees
*Newspaper or magazine articles about the franchise
*A list of the current assets and liabilities.
Through this research, you want to find out the following:
1. If the franchisor as well as the current franchisees areprofitable. How able is the franchisor to stay in business?After all, if the franchisor is not making a profit, there probablywon't be any help later on when you have problems.
2. How well-organized the franchise is. You don'thave to know anything specific about the business to know whetheror not a franchise is well-organized. If you go into a franchiseoutlet or the franchisor's company stores and see that theemployees aren't well-organized and don't seem to know whatthey're doing, then that's not a business worth buying.
3. If it has national adaptability. You want a franchisethat will grow nationally so that it will increase your businesslocally.
4. Whether it has good public acceptance. While it'sgood to have a certain amount of newness, you don't want to bein a business that's so radical you're going to risk yourentire life savings on whether or not people are going to acceptthat idea or concept. Many times, you can feel that you are on thecrest of a wave of a new concept, and you see that it's takinghold everywhere. But if the concept is not tried and proven, bevery cautious.
5. What is its point of difference or unique sellingproposition? You won't have much success if you try to openjust another version of many existing businesses. There has to besomething different about the franchise. A franchisor who has somepoint of difference over other businesses is a much better buy,because that point will set you off from other people.
6. How good the financial controls of the business are.You want the franchise to be backed by a franchisor with strongfinancial management ability so you can determine exactly what thefinancial health of the franchise is at both the corporate and unitlevels.
7. If the franchise is credible. The franchise shouldhave a good track record. That doesn't mean it has to have beenin business for 10 years, but there should be enough of anoperating history to show that this is a viable concept. Thisincludes a good credit rating. If the franchise is in financialtrouble, it will show in the credit rating.
8. What kind of exposure the franchise has received and thepublic's reaction. Find out if the business has had anywrite-ups in papers, and determine what the public's opinion ofit is. You can find this out in trade journals.
9. If the cash requirements are reasonable. If you'regetting into a business that promises a $20,000-a-year return toyou as the owner/operator, it shouldn't have a $200,000investment requirement. The investment should be in proportion tothe kind of return that you will get as the owner/operator.
10. What the integrity and commitment of the franchisorare. This is very important. If the franchisor is willing totake your money without checking you out, that's a sign oftrouble. The more particular a franchisor is, the more confidentyou can feel that the other people in the system are going to begood people as well.
11. If the franchisor has a monitoring system. This willallow you to know what your problems are and how you're doingso you deal with them more effectively.
12. Which goods are proprietary and must be purchased fromthe franchisor? Keep in mind that the franchisor generatesprofit by the sale of proprietary stock at a markup from thewholesale or manufactured cost. Determine which items areproprietary and must be purchased through the franchisor, and whichones aren't and can be acquired through outside vendors at alower cost.
13. What the success ratio is in the industry. If eightout of every 10 businesses started in this industry fail,that's not a very high success ratio. Although franchises havea considerably low failure rate, they're not immune tobankruptcy.
Don't be shy about asking for the required materials fromthe franchisor. After all, they will be checking you out just ascompletely. If they aren't, that should sound a warning bell.Another warning sign is if the franchisor asks you to sign adisclaimer stating you haven't relied on any representationsnot contained in the written agreement. Such a requirement couldindicate that the franchisor doesn't want to be heldresponsible for claims made by its sales representatives.
The franchisor could also be in bad financial trouble andwilling to sell a franchise to anyone who comes along in order toproduce a better cash flow. Or the company may not be verywell-managed, and this could lead to problems in the future. Eitherway, a complete analysis will reveal any and all problems.
