If The Franchise Isn’t A Phenomenal Business Model, Run! 

When the Twitter “franchise victim” said, “Franchising is a phenomenal business model for the franchisor” — did you believe him?

A few readers who wrote to me actually did. Of course, they also claimed to be “franchise victims.”

Disgruntled and pimping his own opportunity

But most readers who wrote to me after I invited them to in my previous blog disregarded the statement as not only a disgruntled former franchisee, but in this case, someone who was degrading franchising in an attempt to make his “bus opp” look more desirable. Smart readers!

I acknowledge there really are victims, sadly

Before I say more on the topic, I want to acknowledge that there are indeed real franchise victims in the world (and the fellow on Twitter may be one) and I sympathize with them. I wish their stories had turned out differently. I’ll also say that in many instances I know they were victimized by despicable franchisors who did not provide a good business model. Franchising is not immune from people who want to bastardize it and take advantage of other people. However — and I say this with disappointment — that’s life. Some non-franchised businesses take advantage of people. Ponzi schemes take advantage of people. Some homeless shelters take advantage of people. Even some churches take advantage of people! Sadly, it’s life.

Buyer beware, some franchise business models suck

If you’re going to invest money in a business — buyer beware! I know that doesn’t help the victims, but I hope it at least says to them that I believe (some of) them, and I acknowledge that they were faultless in their misfortunes. Again, I wish it had turned out differently. I wish their franchisors had provided a phenomenal business model.

But because it didn’t, and because it doesn’t some of the time, that’s not a reason to turn my back on franchising, any more than I’m turning my back on network marketing, or business opportunities, or — for that matter — churches and homeless shelters!

Back to the statement in question

Now to the statement by the Twitter “franchise victim” who wants us to believe that franchising only works out for franchisors and not for franchisees.

Come on now. Go tell that to the thousands of successful franchisees in America alone. These are people who found a phenomenal business model. Or, in truth, in some cases they found a faulty business model and made it work!

How to protect your investment

However, since it doesn’t make sense to argue with a faceless Twitterite, and since franchising can be manipulated to benefit only the franchisor, here are four steps you must take to protect yourself before you invest in a franchise.

#1 get the franchisor’s disclosure document and read it

First, get the franchisor’s disclosure document, read it (several times) and ask your advisors to read it and discuss it with you.

Now the odd thing about this is that franchise critics often pooh-pooh the disclosure document as just another tool in the hands of evil franchisors. They claim the document isn’t of much value — it merely tells you, the prospective franchisee, what’s expected of you and what you must do throughout the lifetime of the franchise relationship, and it doesn’t provide “really useful information” because those “evil franchisors” don’t want you to know the really useful information. They surely don’t want you to know that they don’t have a phenomenal business model.

Find out what’s expected of you as a franchisee

However, if the document at least tells you what’s expected of you (and I promise it tells you much, much more) that’s a great start. It’s much better than buying a non-franchised business, or starting your own business and not knowing what actually will be expected of you!

The disclosure document spells out the amount of money you will need to invest in the franchise, it explains your rights as a franchisee, it details your location, it tells you what you can sell as a franchisee, it includes the franchisor’s audited financial statement, and much more. Some disclosure documents also include earnings claims, but most do not.

Be smart, and avoid stupidity

To overlook the disclosure document (as some “victims” have admitted to me that they did) is inexcusable and, frankly, stupid.

#2 get the list of franchisees present and past

Second, get the list of former and existing franchisees.

It’s in the back of the disclosure document — required by law to be there! Use the list to your advantage. Call franchisees on the list and plan to visit at least one of them. Once again, many “victims” overlooked this opportunity. They became so excited about buying a business that they neglected to do the due diligence, which includes contacting former and existing franchisees and learning about the franchisor’s business model.

Do more than just ask questions

It’s not enough to call a few franchisees and ask them questions by phone. That’s a good exercise, but you should visit a franchisee at the franchisee’s location. Even better, volunteer to work for the franchisee for a couple of weeks — there’s a reason why McDonald’s, the most successful franchise in the world, requires prospective franchisees to work in a McDonald’s for one year prior to qualifying to become a franchisee.

#3 talk to the right people first

Third, consult with your advisors.

You need a franchise attorney. Not just a business attorney. Not the attorney who handled your father’s will. Definitely not your divorce attorney! You need an attorney who understands franchise laws and terminology. Ask the attorney to review the documents the franchisor provides to you — the disclosure and the franchise agreement.

Many accountants dislike franchising

You need to speak to an accountant. Preferably an accountant who is a franchisee because he or she will understand franchising. Many accountants do not understand or appreciate franchising — they’re more likely to tell you that you don’t need a franchise and that you should not pay a royalty. Unfortunately they don’t always tell you that your chances of succeeding on your own, without a legitimate, successful, working franchise, are very slim.

Find an accountant who is a franchisee (consult the list of accounting franchisors) and ask him or her to review your business plan and also look at your franchise documentation.

It’s optional, but franchise consultants may help you

You might also want to speak to a franchise consultant, though it’s not absolutely necessary, especially if you’ve wisely selected your attorney and accountant. Guess what: Even some franchise consultants take advantage of people! I recommend that you contact the International Franchise Association and take advantage of the association’s resources, including books, articles, local meetings, national conventions, and so on. The IFA can introduce you to legitimate advisors, including attorneys, accountants and consultants.

#4 ask lots of good questions

Fourth, ask good questions!

When you subscribed to HowToBuyAFranchise.com you received a copy of my free report: 92+ Questions To Ask Before You Invest In A Franchise. I’ve really done a great deal of your work for you by giving you those questions. Lost that report? Never received it? Let me know and I’ll send it to you.

Adding two new questions to my list

I realize I now need to add two new questions, thanks to the Twitter “franchise victim.” I suggest you ask franchisees these questions:

• Is this franchise a phenomenal business model?
• If so, is the business model only phenomenal for the franchisor?

Now that I think of it, maybe that’s all you need to do. If you ask enough franchisees those questions you’ll get a good read on any franchise company. And if the majority of the franchisees — in fact, if even more than a couple of the franchisees — tell you that it’s a good deal only for the franchisor . . . run!

Go find another franchise to buy, or don’t buy one at all.

Photo image by: klynslis

Categorised in: Buy a Franchise

This post was written by Dr. John Hayes