Three tips to avoid buying a franchise that might go under
Statistics show that your chances for success as an entrepreneur are greater if you start your new business as a franchisee rather than opening a business all on your own. However, there are times when even franchise systems aren’t successful and around for the long term. While there are no guarantees, there are ways you can boost your chances for finding a franchise with stability.
First it helps if you know a little bit about how a business starts to franchise. A franchise company usually begins after a start-up business experiences success and then wants to bring the product or service to a wider audience. One or more additional units, often called company stores, are opened so the product or service can be tested, refined, retested, and improved. Once these stores are successful, the company will begin early franchising efforts by offering licensing agreements.
Tip #1: To avoid risk, confine your research on potential franchise opportunities to those companies that have survived the initial stages of development and have at least 25 or more successful franchise operations in place.
Opening the first 10-25 units can be the most difficult phase for a franchisor. The company will have to learn how the concept works in a variety of locations and with a variety of franchisees. Marketing can be tried on a larger scale and there are hundreds of details to be modified, changed, refined, and locked down.
This is the testing period. Will the product or service catch on with the public? Which advertising methods will be most effective? What skills should a franchisee have? How will the employees be trained? Once this initial pool of franchisees has some financial success, the franchisor will open franchising to a larger group.
If you are a risk taker, feel free to jump in at the earlier stages of a franchisor’s development. Otherwise, wait until the company has completed this initial learning curve and you will avoid many of the bumps along the road. While there are companies that are solid gold from inception, generally the earlier you get involved in any business, the greater the risk.
Tip #2: Call a number of existing franchisees to determine how they feel about the franchisor and if they have achieved their financial goals.
Another way to increase your chances of success as a franchisee is to talk to the existing franchisees in a system. The importance of this step cannot be overemphasized. The very best way to learn about a franchise system is to talk to a variety of the system’s franchisees and ask them very pointed questions, such as, “Have you reached your financial goals as a franchisee?” and “Did your training adequately prepare you to run your business?”
Another question you’ll need to ask is about the overall attitude of the franchisor toward its franchisees. Is the company totally focused on the success of its franchisees? In general, the more the franchisor is willing to help the individual franchisees become successful, the greater the longevity of the company.
By validating the franchisor with a number of the existing franchisees, you will be able to eliminate any company that does not have a majority of successful and happy franchisees and save yourself from being involved with a franchise system that may be doomed to failure.
Tip #3: Become familiar with a franchisor’s support staff.
If you’ve talked to existing franchisees and gotten good feedback about the company, your next step is to take a close look at the infrastructure of the franchise company. Your success as a franchisee will depend on the dedication and expertise of the operational support people so find out how long they’ve been with the franchisor and what previous experience they’ve had. Your conversations with existing franchisees should help you learn whether these people are competent and accessible, but you will also want to talk to these support people yourself to be assured of compatibility. The operations and support people are there for your benefit and you want to make sure you will get your money’s worth out of the association.
When making a decision as important as purchasing a franchise, you want to be sure that the company will be in business for the long term. When doing your research, keep in mind that a franchise that has reached at least a modest number of units (a minimum of 25 is suggested) has a better chance of long-term survival than one that is new to franchising. If that company also has happy and successful franchisees, the right attitude toward mutual success and a great support staff, then you should feel comfortable that the company has a very good chance of survival.
The bottom line is that just like any business, franchise companies can also fail. You can minimize your chances of joining a franchisor that won’t be around for many years by doing a complete and thorough investigation of the company. Following these three tips will take more work on your part but it’s a small price to pay to protect your big investment.
