6 Things to Watch Out For When Shopping for a franchise

By: gunther wharvell


6 Issues to Watch Out For When Buying a franchise

1. Earnings Claims.
This is what is referred to when a Franchise Company publishes monetary info in an space of the Franchise Disclosure Paperwork, or FDD, generally referred to as an: Item 19.
The term Earnings Claim additionally arises when someone, a sales person, consultant or broker, makes an "earnings declare". This occurs when somebody quotes a dollar determine, whether gross or web, to a possible candidate if that data shouldn't be reported in the FDD.
The factor to be careful of with reported financials or earnings claims in a Franchise Disclosure Doc is the method that the company used to calculate the numbers. I have seen many alternative ways of calculating an "average".
Prime third, mid third & backside third. This is the place a franchisor takes all of their Franchise homeowners and splits them into 1 of three categories. Top/Mid/Bottom. They then calculate the common gross or internet revenues for each section. The factor to be careful of is that when reviewing these figures, most individuals assume to themselves, "I shall be above common" in owning my business. Nobody thinks to themselves "I am going to be in the bottom third of the system". That simply is not how individuals think.

I like to recommend taking the average of all franchises in that system.

Another method that some companies calculate & report an earnings claim is a Gross Profit instead of a Web Profit. However as a result of people see the word "Revenue" they generally think that is how a lot cash they are going to make. This just isn't accurate. Gross revenue is prior to some bills & taxes. Web revenue is after all bills and in any case taxes. Please don't get confused when evaluating gross & web profit figures.

2. Validation Ringers.
You have an interest in a franchise, you discuss to the corporate and find out you're qualified. They send you a Franchise Disclosure Package deal and tell you that you must discuss to a few of their existing franchise owners. They provde the names & cellphone numbers of a half dozen folks to name that already own the franchise.
STOP! These are generally what I confer with as Validation Ringers, that means, these people are being given to you for a reason. Whenever you call them, you will generally hear all good things. The act of supplying you with that info for the aim of due diligence isn't legal within the Franchise Industry. The Franchisor can not direct you to call sure people.
Included within the Franchise Disclosure Paperwork is a list of Franchise House owners & numbers. Name 5 or 10 of them at random in addition to those the Franchisor provided to you, in the event that they did, if they didn't, name as many as you possibly can till you feel snug that you are hearing constant things.
In my opinion a franchise company will give you particular franchise house owners to name for considered one of two reasons. Primary, they're afraid that if you happen to name random owners you will find out that the system is not as great as they make it out to be. Or two, they're pushing the sale forward quickly. By you calling a number of of the "loaded weapons" you will transfer via the process faster.
Both reason is invalid and unlawful, a franchisor will not be permitted to direct you on who to name when you are performing your validation/due diligence calls.

3. Interview/Process.
Franchising is all about following the system. Most Franchise corporations haven't got a proper interview process where they sit down at a protracted table and also you discuss to the board of directors to get approved. Just a few do it that approach, but in my experience it's a small variety of corporations that do it that way.
Most Franchise Corporations use the research course of as the primary part of the interview. Their logic is that when you can follow the process of analysis then you definately would make a better franchise owner than if you cannot or aren't willing to follow the research process.
If you cannot observe the research process properly they don't really feel you'd be good at following a system. And that is what Franchising is all about, following the system.
Here is a generic course of that seems to suit most firms, of course, every company is a bit totally different, but this will provide you with a fundamental overview of what to expect.

4. Talking to local franchise house owners
As outlined in the previous section, in some unspecified time in the future, you will start speaking to current Franchise Owners. Your preliminary inclination will probably be to speak to the native franchise proprietor in the next town over or even on the other end of your town.
Watch out if you do this, I have noticed a bit of resistance after I talked to existing franchise homeowners in my city about opening one other location on the opposite aspect of town. Either they felt threatened as a result of they thought I would take their prospects or possibly they thought I might have an effect on their skill to expand with different items, but either way, the solutions I received were slightly completely different and a bit extra hostile than after I called house owners exterior of my area.
I'm not saying do not do it, I do recommend it at the proper time, but moderately, take it with a grain of salt and evaluate for consistency with other franchise homeowners in similar markets outdoors of your area.
You also run the risk of that local franchise proprietor shopping for the territory to protect their growth desires. So be cautious of operating right down to your local enterprise and asserting that you're going to open one other one nearby. Franchise homeowners could be a little territorial.

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