Austin Business Journal

June 2, 1997

Focus: Small Business/Franchising

Buying a franchise? Pay attention to the nitty-gritty

Experts advise researching company's background, growth plan, services offered, restrictions, duration of license

Shelby L. Murphy Special To The Austin Business Journal

ou've always wanted to own your own business, and you're thinking buying a franchise may be the way to go. A quality operating system in place, instant name recognition and support from others who've been in your shoes sounds pretty appealing.

But experts say buying a franchise is a large investment of both time and money. Not only are you shelling out your retirement account or maybe your child's college fund, but you also are buying yourself a new career.

It is a weighty decision. Fortunately, there are a number of questions you can ask and information that will be provided to you that will help minimize your risk.

"We always recommend the first question should be inner directed," says Don DeBolt, president of the International Franchise Association.

Determine what your skills are and your financial ability to invest, says DeBolt. Look for a franchise that offers a concept that is compatible with your skills and values.

Karl Martin, vice president of international development for Schlotzsky's, agrees that a potential franchisee should first do a personal evaluation.

"What people really need to do is something basic -- determine if you like the product," says Martin.

Martin also recommends determining your personal commitment to the business. He says if you are a hands-off type and want to operate your investment remotely, a franchise probably isn't a wise choice.

"It's nitty-gritty, netail-detail work," Martin says. "The successes are the ones that are personally operated."

A large number of people investigating franchises, says Martin, are not serious about running a business.

If you are absolutely convinced that you have a good manager other than yourself to run your franchise, Martin says to make sure that person has some equity in the company.

After taking a long look at your needs and what type of franchise would complement your style, DeBolt and Martin suggest asking some specific questions to make sure the franchiser is credible and the concept is viable.

First, ask how long the franchiser has been in business, says DeBolt. If the company has been around for a while, DeBolt says the concept is probably durable.

Make sure the business concept is good for the new millennium, says Martin.

If the company isn't growing, find out why.

"Franchising is a business of growth," says Martin. "Franchises that don't grow die."

Next, ask how many units are in the system, says DeBolt. How many of those are company-owned? If most are company-owned, DeBolt says franchising may be new to the company or it might be the company is converting franchises into company stores, which could be a good exit strategy for a franchisee.

Also, make sure the franchiser allows or even encourages franchisees to buy more than one unit, says Martin. Find out how many multiunit owners the franchise has.

Ask what each unit averages in revenue, says DeBolt. Find out what the high and low units' revenues are. DeBolt says to question how many units are doing more than $1 million in sales.

Determine what restrictions are placed by the franchiser on operating the business, says Martin.

Keep in mind that franchising allows the buyer license to the logo, name and operating system, says Martin. Because the corporation still owns the logo, name and system, there will be quite a few restrictions on the way your business is run.

Find out what services are offered by the franchiser, says Martin. Will the corporation handle all your accounting and payroll? How much marketing support is provided and what percentage of your revenue are you expected to give back for that support?

Determine the duration of the franchise, says Martin. Some franchisers may license franchisees for 10 years, some for as long as 20.

Although it is a good idea to ask these questions early in the investigation process to determine whether or not to pursue the franchise any further, all questions will be answered through a Uniform Franchise Offering Circular, says DeBolt.

The UFOC is a lengthy document that every franchiser is obligated to provide prospective franchisees, says DeBolt.

"[The UFOC] is everything you wanted to know or were afraid to ask," says Martin.

The document details the officers of the franchise, if the company has been sued or has sued someone, if the company has been convicted of anything, and a list of franchisees that are in the system or have left the system, says DeBolt.

Particularly useful, says DeBolt, is the list of franchisees. Call franchisees in the system and ask if the franchiser has lived up to their expectations, he says.

Then call the franchisees that have left the system, says DeBolt, and find out why. Did they sell out? Was there an illness? Was it a financial failure?

"There is so much opportunity to gather information up front before making a decision," says DeBolt.

Martin recommends getting legal advice when it's time to sign the contract.

Seek help from an attorney who is experienced in franchising, he says, not just contracts.

Martin says most franchise contracts come with boiler-plate copy, meaning it is standard in every contract and is not negotiable, like the licensing fee.

Often attorneys who haven't dealt with franchises try to make changes to the boiler plate and end up charging their client for wasted time.

Martin says he has seen many franchisees accumulate huge legal bills before they even invest from using an inexperienced attorney.