The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.
So you’re thinking of buying a franchise. Proven model, less risk, no need to design graphics. That means it’s time for due diligence.
The first step is easy. What is your income expectation? You have to know and be comfortable with what you might be earning, especially in the early stages of franchisor-hood.
An acquaintance who bought into a nationally branded franchise planned on a comfortable six-figure salary for himself. But the revenue that his operation was generating could not sustain it. He kept paying himself at the rate he needed for the lifestyle he wanted. He is now out of business.
Due diligence also means planning for a worst-case scenario. What if you hit at 75 percent of your projections? Do you understand the cash flow ramifications of that?
It really doesn’t matter what type of franchise you are investing in – the method is the same. Take nothing for granted, and interview all the people you can. Talk to existing franchisees. Ask for a roster of stores that have closed in the past 24 months and talk to those folks. Take some time to talk to your would-be competitors. Pick a major city in your region and ask the franchisor for the name of the best operator in that area, then ask for the name of the operator in the area that challenges them the most.
Years ago, I sold a franchise to a great guy. I thought he did a fair amount of diligence prior to closing. So I was surprised to get a “Mark, we need to talk” call a few months later. During our meeting, the franchisee kept lamenting the fact that no one in the bays enjoyed listening to opera. True story. I have been in auto service bays all over the world. Pavarotti is just not that common a find. Two years later, this same gentleman closed his doors and walked away. I felt terrible about it but am not entirely sure how I could have seen that one coming.
Now for some of the nitty-gritty. Read the Uniform Franchise Offering Circular (U.F.O.C.) cover to cover. This document is your new bible. Take a long look at the litigation section. Every franchisor is required by law to post any and all ongoing litigation they are involved in. How many suits are there? What are the common denominators? Numerous suits or issues better set off warning alarms.
Most U.F.O.C.s are fairly strict about what you will and won’t be allowed to do – and this is a key into the heart of the organization you might be joining. I have always enjoyed reading about the Great Harvest Bread Company in Dillon, Mont. Their U.F.O.C. says that anything not expressly forbidden is approved.
If you are a creative type who believes that nonlinear innovation begins with unreasonable goals, these restrictions can be a real pain in the franchise agreement. Case in point: I have rolled out two programs, a mobile service idea and a remote service kiosk that, had I not had a good relationship with them, Midas could easily have sent a cease-and-desist letter on. Fortunately, they are very interested in the test.
The next step is to run the numbers. In fact, it might be the first step, because if the numbers don’t work, there is no reason to even bother with the other steps. Line one is revenue. What are your sources of revenue: product sources, labor sources, alternative income stream sources? Let me give you an example. My Midas Auto Service Centers sell parts to make the repairs we recommend and we sell labor to install those parts. Both of these areas are income streams, and need to have standalone profitability analysis done. It goes much deeper than that, though. Within the parts category, there are brake jobs, oil changes, tire installations, water pumps and so on. Each of these items comes with a unique supply chain, a different market-based pricing matrix and differing technical competence requirements for diagnosis and install.
What products are you going to sell? What is the average revenue per transaction? How many transactions are you going to do a day? How can you verify and validate your answers to each of these questions? Your economic survival might well depend on the accuracy of your inputs here.
Lastly, be a street level detective. To this day, I mystery shop everybody – in all kinds of businesses. In his book “The World is Flat,” Thomas Friedman tells of a McDonald’s franchisee who set a system to remotely manage his drive thru operations. Transactions per period and revenue per transaction reportedly increased very quickly. My take was to talk to my computer guru and figure out a way to set up a call center where all in-bound service calls were handled centrally. Seven out of 10 automotive service customers call first, so if that experience is improved and we convert just one more call a day, it was worth it. Mystery shop franchises, independents, anything and everything that is related to what you are investing in. Find the suppliers for your service and ask what they think. There is no such thing as too much information.
OK, so now we have chosen an industry you find appealing and we have created a workbook of detailed understanding and modeling of how you are going to do things. What’s next? Staffing, KPIs, market share capture and growth, marketing – more and more. I look forward to hearing about your success!
Mark Smith makes some very strong points in this article about how to analyze and pick a franchise. Many people hear that franchising is a good way to get into business and they think all franchises are great. Some franchise systems are run very well and some are not. I work with people buying franchises and many have had similar experiences with franchise sales people; they have been sold on the products or services of the franchise without any consideration for the business aspects of the franchise. A great pizza, for example, that costs too much to make is not… Read more »