• A calculated risk: buying a franchise

    Posted on March 27th, 2014 johnhayes 4 comments

    Screen Shot 2014-03-27 at 6.13.06 PMDo risk takers buy franchises?

    I thought so, until I interviewed franchisees for Franchising: The Inside Story, the first book written about how to buy a franchise. When I asked franchisees how they felt about taking risks, I got an education. I thought franchisees were entrepreneurs, and entrepreneurs are risk takers, but it turned out I was wrong.

    Is it do or die for you?

    Franchisees may think of themselves as entrepreneurs (even though many franchisors prefer not to sell to entrepreneurs), but they do not see themselves as risk takers – the people who put everything on the line with little or no assurance of a safety net. When risk takers buy or develop a business, they invest their life savings and more (money borrowed from banks, family and friends). For the risk taker, it’s do or die.

    For the franchisee, it also may be a do or die scenario, but it doesn’t have to be. If you select a franchise opportunity with a good track record, one in which most of the franchisees have succeeded historically, your safety net is the franchisor. Franchisors are responsible for providing franchisees with a plan for operating the business, plus training and ongoing support. When you face a challenge as a franchisee, you contact the franchisor for help.

    You can’t call a friend

    An entrepreneur, on the other hand, may have to face challenges alone. Risk takers can’t easily call a “friend” in the same business because they are competitors. Instead, risk takers try to figure it out on their own, and that often leads to failure.

    This is not to say that franchising comes without risks. Not at all. As one prominent franchisee told me, “I am a calculated risk taker.” In other words, he did his homework before buying multiple franchises.  Savvy franchise candidates “kick the tires” (two or three times) before they buy a franchise. They ask all the necessary questions, they visit the franchisor as well as existing franchisees, and they make certain their personality is compatible with their franchise of choice. For those reasons, franchisees are not risk takers. They take calculated risks.

     

     


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  • Is it “safer” to buy into a large franchise network?

    Posted on March 2nd, 2014 johnhayes 8 comments

    Buying into a small franchise network, i.e. under 100 units, poses risks that buying into a large franchise network, i.e. 250-plus units, can avoid. The reasons include money, experience, and, well, more money!

    People who know little about franchising often say it’s too expensive for the new franchisee, but it’s even more expensive for the franchisor. Royalty flow doesn’t amount to much cash flow in the early stages of franchising.

    Will your franchisor scramble?

    The most vulnerable franchisors are the small-network franchisors. Many of them are constantly scrambling just to meet their corporate payrolls — that could mean there’s no money to properly train and support their franchisees, or to help their franchisees market and promote the brand.

    But before I lead you to decide that buying into a large franchise network is a better idea, or that it ensures longevity, there are some other points to consider.

    Does franchising make sense for you?

    Frankly, unless you’re cut out to be a franchisee, it won’t matter which size network you join. Chances are pretty good you will not survive. In addition, unless you’ve got sufficient capital (larger network fees are usually more expensive), and possibly experience, the large network franchisors may not be interested in you.

    Small franchise networks are often more willing to take chances, which partly explains why many of the franchisors and franchisees in this niche fail. Franchising, by its definition, isn’t about taking chances!

    Safety isn’t a matter of size

    On the other hand, every large franchise network started out small, so safety in franchising isn’t necessarily a matter of size. It is more a matter of how well the franchisor is prepared to be a franchisor, and how well the franchisee is prepared to be a franchisee. I can’t emphasize enough the importance of being a fit for franchising.

    So let’s say you are a good fit for franchising and that you have the financial ability to buy into any network of your choice. Would I push you toward a large-network franchise? Maybe, and here’s why:

    But size still matters

    • Money. Large network franchisors at least have the ability (but not always the desire or knowhow) to cater to their franchisees, which effectively accelerates the new franchisee’s performance and leads the franchisee to profits and satisfaction.
    • Experience. History repeats itself, even in franchising, and the large-network franchisors can do a better job of guiding a franchisee’s decision making process, which protects the franchisee from failure. Plus, the larger franchisors are not inclined to take chances because they’ve already invented their wheel. They stopped experimenting when they were a small franchise network.
    • More money. There’s no end to what a franchisor with money can do for its franchise network. Here are three ways large franchise networks use money to help franchisees:

    Three big advantages

    1. They hire real staff, and not just members of the franchisor’s family, who work for free. Larger franchisors hire experts in training, marketing, brand development, franchisee support, research and development, HR, legal, accounting, etc. In the small franchise network, it’s not unusual for the founder to fulfill several of those key roles.
    2. They offer training programs regionally as well as nationally so that more franchisees can participate in them, and when necessary, they spend time in the field working one-on-one with franchisees in need. They help franchisees better understand how to operate the business and they re-train franchisees when necessary.
    3. They contribute (or possibly loan) money to the franchise advertising fund to better promote the brand and drive more customers or sales opportunities to the franchisees. A franchise network that’s strapped for money must rely on the franchisees to promote the brand, but how effective is that if the franchisees are also strapped for money? Large franchise networks bring resources to their franchisees’ advertising and promotion campaigns.

    Small franchise networks pray for the day when they break the size barrier because, as Ayn Rand told us, “All sins are forgiven once you start making a lot of money.” Of course, large franchise networks don’t just concentrate on making a lot of money; they focus on meeting the needs of their franchisees, and that makes franchising safer.

    Full Disclosure: I am an affiliate of the Franchise Navigator and may benefit financially if you complete an assessment tool that helps you decide if it makes sense for you to invest in specific franchises. 

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  • Avoid: 7 warning signs when buying a franchise

    Posted on March 1st, 2014 johnhayes 9 comments
    Dr. John Hayes

    Dr. John Hayes

     

    It’s easy to get excited about investing in a franchise—just look at the numbers: There are 757,000+ franchised small businesses in 75+ different major industries; franchises account for nearly $1 trillion in U.S. retail sales and for more than 40% of all U.S. retail sales; approximately 1 of every 12 retail business establishments in the USA is a franchise, and they employ more than 8 million people!

    But which franchise to buy?

    While all of this speaks well for franchising, not all franchises are worthy of your investment. Be careful. Do your homework. When you’re considering a franchise investment, avoid these 7 warning signs:

    1. The franchisor seems too eager to sell you a franchise. You’re getting more emails and calls from the franchisor than you believe are necessary. Do you want a franchisor who may need you more than you need them?
    2. You can’t get the franchisor’s disclosure document. In the USA, once serious discussions begin between a franchisor and a prospect, the franchisor must provide the FDD, free. Can’t get it? What’s the franchisor hiding?
    3. Existing franchisees either won’t talk to you, or they have negative things to say about the franchisor. Keep in mind that sometimes franchisees do not want more franchisees in the network. It’s important to call a representative sample of franchisees.
    4. The franchisor has sold many more franchises than it has opened. Why? If franchisees are waiting for months to get into business, what’s going on?
    5. The franchisor tells you which franchisees you can talk to as you conduct your due-diligence. It’s okay for a franchisor to direct you to franchisees whose backgrounds are similar to yours, or to bring franchisees to Discovery Day to meet you. But make sure you randomly select franchisees and talk to them about investing in the business.
    6. You feel pressured by the franchisor or the franchisor’s sales representative, including a broker. “There’s only one franchise available for your market and you’re not the only person who’s interested in it.” You should be more interested in knowing if you are the best-qualified person for the franchise. Don’t buy under pressure.
    7. The franchisor isn’t interested in assessing your  personality profile to see if you’re a good fit for the franchise. You can’t force a square peg into a round hole. Most franchises are fabulous opportunities, but for the right personalities. If your personality doesn’t match the requirements of the franchisor’s business, you lose!

    There are more than 7 warning signs when buying a franchise and I discuss them in my best-selling ebook, Buy Hot Franchises Without Getting Burned.

     


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  • “You don’t think I should buy a franchise?”

    Posted on December 10th, 2013 johnhayes 12 comments

    Screenshot 2013-12-10 20.27.43“No, I don’t think you should buy a franchise . . . here’s why . . .”

    That’s how I began to sum up a recent meeting with a husband and wife who met with me to explore the option of buying a franchise. In this case, the wife already operates a successful business in a “personal care” industry.

    She bought the business about four years ago, keeps it open 7 days a week, 10 hours a day, and is essentially maxed out. “Some days,” she said, “customers are standing in line even when I close the salon.” Recently, she was contacted by a franchisor in Dubai who suggested that she convert her business to his franchise network.

    My question: Why?

    Chances are, she knows as much as the franchisor knows. Why would she “convert” her independent shop to a franchise and start paying a royalty on her gross sales?

    • For brand identity? Well, yea, that’s a good reason to buy a franchise, but she doesn’t need brand identity. Her business is maxed out!
    • For the franchisor’s system? Well, yea, that’s a good reason to buy a franchise, but her system already works. As she told me, “It took me about eighteen months to figure out how to succeed at the business, but now it’s going great.” Why does she need a new system?
    • For buying power? Well, yea, maybe, because a franchise network should be able to buy products and equipment for less money than can an independent, but even so, is it worth converting her independent salon to a franchise that will require her to pay a royalty, and perhaps incur other costs? First she’d have to figure out how much money she’d save with the franchisor’s buying power. My guess: Not enough to offset the royalty.

    My suggestion: Franchise!

    “I want to expand my business, and that’s why I thought it would be a good idea to buy the franchise for Kuwait,” the lady explained.

    I replied, “But you may already have a better system than the franchisor’s. Why not franchise your system? Or why not simply open more salons using your system? You would own the salons 100 percent and not pay royalties, or any other fees.”

    She was surprised because, after all, I promote franchising. But actually, I promote the development of satisfying and profitable businesses, franchised or not.

    I think this lady could make a good franchisee, but given her background and experience, and given her desires, I think she also could make a good franchisor. “If you had a few days, could you write an operations manual for your salon? In other words, could you write down everything that needs to be done daily or weekly, monthly or quarterly to operate your business successfully? And could you also identify how to advertise to bring in customers, and how to treat customers?”

    “Yes,” she said.

    “Okay, that’s still not enough. A franchisor has numerous other challenges to overcome, but you’re off to a good start. It’s also important that you have the right personality to be a franchisor. Is it more important to you to operate your salon, or more important to replicate your business and train and support others to operate your franchises?”

    Well, she hadn’t thought about all of that and we parted with me giving her a laundry list of things to consider. Sometimes, it just doesn’t make sense to buy a franchise, and I think this is one such case.


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  • Real Italian Water Ice: A Winner for Kuwait & the Region

    Posted on November 14th, 2013 johnhayes 4 comments

    IMG_1614Rita’s Water Ice is one of my favorite American franchises. It’s headquartered in Philadelphia, the greatest city in the world, and it’s perfect for Kuwait and the Middle East. Rita’s serves authentic Italian water ice — cool and refreshing, a favorite treat for children and adults — it can be low-cal, too, but we usually don’t want it that way! I don’t know why it’s not already in Kuwait, given that this is a “hot” franchise market, but I was pleased to see Rita’s marketing itself and looking for prospects who want to buy franchises at the Abu Dhabi Franchise Conference. Can’t be long until we can enjoy Rita’s locally!


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  • Prepare For Franchise Expansion in the UAE

    Posted on November 14th, 2013 johnhayes 4 comments
    At the International Franchise Conference in Abu Dhabi, November 2013. Opportunities abound in the UAE for franchise expansion.

    At the International Franchise Conference in Abu Dhabi, November 2013. Opportunities abound in the UAE for franchise expansion.


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  • Argument #1 Franchise Fee: It’s Too Much Money!

    Posted on November 9th, 2013 johnhayes 8 comments

    Screenshot 2013-11-12 23.29.33For the last 30 years I’ve asked my audiences (mostly prospective franchisees) the same question: “What’s wrong with franchising?” And through the years thousands of people have told me that the Franchise Fee is too expensive. Today I’m starting a series of arguments about the Franchise Fee. From time to time I’ll update this topic. Look for other argument series about other topics in this blog. 

    Typical Franchise Fees

    Franchise fees typically range from $10,000 (rarely less) to $50,000 (sometimes more) and they are paid in a lump sum to the franchisor at the time of signing the franchise agreement. Prospective franchises often complain that the fee is too expensive. From the get go I’ll agree: Some franchise companies charge inflated franchise fees and you should avoid them. But most of the franchisors I’ve assisted through the years — especially the most credible franchisors — require very reasonable franchise fees. In fact, many franchisors should increase their fees, but they’re afraid to because they would exceed the typical range.

    Before you come to any conclusions about the amount of the franchise fee, I encourage you to consider several points of view, as well as the facts surrounding franchise fees. And rather than tell you everything that’s important to know about franchise fees in one article, I’m going to share my ideas one at a time. Over a period of time I’ll write a dozen, maybe more, “arguments” about the franchise fee and after you’ve read them you may see things the way I do.

    No Franchises Sold Here!

    By the way, it’s never my intention to get you to agree with me so that you will buy a franchise. Whether you buy a franchise or not matters not to me — at least not financially. I don’t sell franchises. That separates me from most of the people who write franchise blogs. Of course, it would matter to me if you bought a franchise and you were not a good fit for franchising, or if you passed on buying a franchise because you didn’t understand something relative to franchising. I’m an educator first and foremost, and I do not get paid for convincing people to buy franchises. I get paid for speaking, training, coaching, and writing books (sometimes articles) that provide honest, credible and objective information about franchising so that my audiences can make informed and wise decisions.

    So when a prospective franchisee says the franchise fee is too much money, I want to know: Compared to what?

    Sometimes the prospect will say, “Compared to what it would cost me to start the same kind of business on my own.” Fair enough. In fact, many franchisors started their original business for less than they now charge for the franchise fee. One of my books includes stories about numerous franchisors (i.e. Two Men & A Truck, Little Caesar’s Pizza, Jani King, etc.) that started their businesses for less than $10,000.

    Keep Comparisons Fair

    But franchisors are not selling a “similar” kind of business. Franchisors are selling a specific brand identity, with a brand promise (that may or may not be valuable), plus training and support, and an operating plan for developing a successful business. Yes, you could start a pizza or cookie or plumbing business, etc. for a small amount of money — probably less than $10,000 even today — but it won’t be part of a franchise network and it won’t come with the intellectual property already explored, tested and certified.

    Don’t confuse starting a business from scratch from buying a franchise business that comes with bells and whistles. To get your own bells and whistles you’ll need to do a lot of huffing and puffing, and possibly spend several hundred thousands of dollars (or more) as you test your ideas and figure out how to make your business prosper. Maybe it makes sense to pay a fee to learn from someone else’s huffing and puffing. It’s an expensive proposition to develop your own concept. On the other hand, you might develop the next McDonald’s!

     


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  • When Franchise Brokers Become Valued Advisors

    Posted on November 2nd, 2013 johnhayes 10 comments

    Many people are wary about using franchise brokers for fear that the broker will talk them into buying a franchise they really don’t want. Franchise brokers are, first and foremost, sales people, and given that they don’t get paid until they make a sale, there’s good reason to be concerned about using a broker when you’re thinking about buying a franchise.

    On the other hand, most people who buy houses use a real estate broker or agent, and they also are sales people who don’t get paid until they make a sale. Will they talk you into buying a house you really don’t want? Possibly, but it’s less likely if you do your homework and know what you want to buy.

    A Broker’s Value

    Using a franchise broker – a sales person who represents multiple franchise opportunities – is not an excuse for ignoring the homework that you should do prior to buying a franchise. When you know what you want to buy (because you’re passionate about operating a particular kind of business, or because it’s a “hot” franchise), and you know what you’re qualified to buy (financially and skill-wise), a franchise broker becomes an advisor, every bit as valuable as an accountant or lawyer.

    Jason Killough

    Jason Killough

    But what if you don’t know which franchise you want to buy, or what you’re qualified to buy? One franchise broker thinks that’s all the more reason to call him, understandably. I’ve known Jason Killough for some 20 years. In fact, he used to sell franchises for me when I was a franchisor. Since 2009, Jason has been a franchise broker in Dallas, Texas.  He’s part of The Entrepreneur Authority, one of the most credible franchise broker networks in the USA. “When a prospect doesn’t know what to buy, I can help identify opportunities that the prospect might not even know about,” explains Jason, who represents a variety of franchise companies.

    Match Opportunities & Expectations

    Of course, it’s not enough to identify opportunities for you. A good franchise broker will also help match opportunities to your expectations and skill set, as well as your checkbook. And again, Jason knows how to be helpful. “I help my prospects with their due diligence,” he continues, “and I save them a lot of time. I not only know who the franchisor will accept as a franchisee, but I also know who the lenders will accept, including any ‘blemishes’ that may be on the prospect’s credit report.”

    Perhaps the best part of working with a broker is the fee – it’s usually paid for you by the franchisor. Franchise brokers are working for commissions. Some may charge incidental fees for training or personality assessments, but in most cases you won’t pay the broker – your franchisor will.

    You are not required to use a franchise broker, but all things considered it may be a good idea. If at any point you think a broker is leading you toward owning a franchise that you don’t want, walk away, stop answering your phone, or simply tell the broker, “I don’t want to own that franchise. Can you help me find a better choice?” If he or she is worthy of being a franchise advisor, the broker will help you find a better choice!


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  • Should You Buy a Franchise If You’re One of the First Franchisees to Join the Network?

    Posted on October 26th, 2013 johnhayes 16 comments

    A question franchise buyers frequently ask at my How to Buy a Franchise seminars goes like this: “If I buy a franchise where I’m one of the first franchisees in the system, is that the kind of franchise to buy? Should I be concerned about owning a franchise when there aren’t many other franchisees connected to the brand?”

    It’s an important question relative to how to buy a franchise and I answer it with this true story.

    True Story

    One Monday afternoon a new franchisee in Kansas telephoned his franchisor in Dallas and said, “I need help. Either your franchise doesn’t work, or I’ve got a problem. I cannot close any deals and I am ready to quit.”

    “What are you doing Thursday morning?” the franchisor asked. He was also the founder of the franchise company.

    “I’ve got sales appointments set for that day, but I don’t know that I’ll be able to do any good with them. . . . Why?”

    How many franchisors will do this?

    “Can you pick me up at the airport at 9 in the morning? I’ll go on those sales appointments with you and we’ll figure out what’s going on.”

    “Wait a minute,” said the franchisee. “Are you saying you are flying here to see me?”

    “Why, you don’t want me to?” asked the franchisor.

    “Sure. But I didn’t expect you to do that. I thought maybe you could tell me over the phone how to solve my problem. Or maybe I should just sell the franchise.”

    The franchisor laughed. “If you’ve got a problem, it’s my problem, too. I’ll send you an email in about an hour to give you my itinerary. In the meantime, don’t sell the franchise and don’t worry. Oh, one other thing. See if you can set up several more appointments.”

    Small Franchise Advantage

    That story explains what may be the greatest advantage of buying a franchise from a franchisor who has sold only a small number (under 50) of franchises. That kind of franchisor, providing he or she is honest (they’re not all honest), remains accessible to franchisees and will help solve problems even if it means visiting the franchisee.

    I can vouch for this story because the franchisor was my client (the late Ken D’Angelo, founder of HomeVestors, which was one of America’s most viable franchise ventures until the real estate bubble burst several years ago. I was CEO of the company at that time.) Ken invited me to join him on this journey to Kansas City and I watched as the master worked.

    The master at work

    Once we landed in Kansas we didn’t stop until early evening. The franchisee had set up six sales calls – his goal was to buy houses at a discount – and we accompanied him on each call. For the first two calls, we watched. Then we went to lunch and Ken evaluated the franchisee’s performance. He recalled each question that the sellers had asked the franchisee and reminded the franchisee of how he responded to each question. And then Ken reconstructed the calls and showed the franchisee what he would have done had they been his sales calls.

    He bought two houses!

    We went on the next two sales calls and Ken bought two houses. The franchisee was amazed (I was, too), but Ken didn’t seem surprised. (On our way home the next morning he told me he got lucky, but Ken was one of the most humble franchisors ever). The franchisee handled the next two calls on his own and didn’t buy a house, but he demonstrated greater confidence. As it turned out, one of the sellers called him three days later and he got the sale. I don’t remember what happened to the other opportunity and it didn’t matter. By this time, this franchisee was re-energized and he became a productive member of the HomeVestors’ network.

    Of course, it wouldn’t have happened had Ken not picked up his phone that Monday. That’s one of the other good things about small-network franchisors. They have more time than money, and Ken couldn’t afford to hire someone to answer his phone for him! He also couldn’t afford to send a field trainer in his place. Ken was eager to go on these calls himself because he always wanted to know how he could improve his franchise system.

    A franchise to buy

    Yes, you should be concerned about buying a franchise that not many other franchisees have purchased . . . on the other hand, if you can find a franchise concept that you love, one that may even be “hot,” and a franchisor who you know will place your best interests before his own, you can be a little less concerned.


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  • 101 Questions to Ask . . . now at Amazon.com

    Posted on September 7th, 2013 johnhayes No comments

    Asking 101 questions before you invest in a franchise sounds like a lot of work, doesn’t it? The good news is that you don’t have to ask 101 questions — however, you do need to ask the right questions before you invest in a franchise, and many people simply do not know what to ask. In this e-booklet I’ve listed important questions to be asked of franchisors, franchisees, professional advisors and even franchise suppliers. There could be more than 101 questions to ask — if you have a question that I missed, please let me know — but these questions will help you think about franchising in advance of making a decision, and you’ll know who to ask to help you make a decision.

    Looking for reviewers! I just posted this book and it’s had no reviewers — will you be the first?


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