6 Issues to Watch Out For When Shopping for a franchise

By: harvey wharvell

6 Issues to Watch Out For When Buying a franchise

1. Earnings Claims.
This is what's referred to when a Franchise Firm publishes financial information in an space of the Franchise Disclosure Documents, or FDD, generally referred to as an: Item 19.
The term Earnings Claim also arises when somebody, a gross sales particular person, marketing consultant or broker, makes an "earnings declare". This happens when someone quotes a greenback figure, whether or not gross or net, to a possible candidate if that data just isn't reported within the FDD.
The factor to be careful of with reported financials or earnings claims in a Franchise Disclosure Document is the process that the company used to calculate the numbers. I have seen many different ways of calculating an "common".
High third, mid third & bottom third. That is where a franchisor takes all of their Franchise house owners and splits them into 1 of three categories. High/Mid/Bottom. They then calculate the typical gross or net revenues for each section. The factor to watch out of is that when reviewing these figures, most people think to themselves, "I might be above common" in proudly owning my business. Nobody thinks to themselves "I'm going to be within the bottom third of the system". That just isn't how people think.

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

One other manner that some firms calculate & report an earnings declare is a Gross Profit instead of a Internet Profit. But as a result of individuals see the phrase "Profit" they sometimes suppose that is how much cash they'll make. This just is not accurate. Gross revenue is prior to some bills & taxes. Net revenue is in any case bills and in any case taxes. Please do not get confused when evaluating gross & internet revenue figures.

2. Validation Ringers.
You are interested in a franchise, you talk to the corporate and discover out you're qualified. They send you a Franchise Disclosure Bundle and inform you that it's best to discuss to a few of their current franchise owners. They give you the names & telephone numbers of a half dozen individuals to name that already own the franchise.
STOP! These are generally what I discuss with as Validation Ringers, that means, these people are being given to you for a reason. Once you call them, you will typically hear all good things. The act of providing you with that information for the aim of due diligence just isn't legal in the Franchise Industry. The Franchisor can't direct you to call sure people.
Included in the Franchise Disclosure Paperwork is a list of Franchise House owners & numbers. Call 5 or 10 of them at random in addition to those the Franchisor offered to you, if they did, in the event that they didn't, name as many as you possibly can till you're feeling comfortable that you are hearing consistent things.
In my view a franchise firm will provide you with specific franchise owners to name for one in every of two reasons. Primary, they are afraid that for those who name random house owners you will see out that the system is not as great as they make it out to be. Or two, they are pushing the sale ahead quickly. By you calling just a few of the "loaded guns" you'll transfer by means of the process faster.
Either reason is invalid and illegal, a franchisor isn't permitted to direct you on who to name when you're performing your validation/due diligence calls.

3. Interview/Process.
Franchising is all about following the system. Most Franchise firms don't have a proper interview process the place they sit down at a protracted desk and also you speak to the board of administrators to get approved. A few do it that manner, however in my experience it is a small variety of companies that do it that way.
Most Franchise Firms use the research process as the principle part of the interview. Their logic is that when you can follow the method of research you then would make a greater franchise owner than if you cannot or aren't prepared to observe the research process.
If you cannot observe the analysis course of properly they do not really feel you'll be good at following a system. And that is what Franchising is all about, following the system.
Here is a generic process that seems to suit most firms, in fact, each company is a bit completely different, however this gives you a primary overview of what to expect.

4. Speaking to native franchise homeowners
As outlined in the previous part, at some point, you'll begin speaking to existing Franchise Owners. Your initial inclination will likely be to speak to the local franchise owner within the subsequent city over and even at the other end of your town.
Be careful whenever you do this, I have noticed a little bit of resistance once I talked to existing franchise homeowners in my city about opening another location on the other side of town. Both they felt threatened as a result of they thought I would take their clients or perhaps they thought I'd have an effect on their means to develop with different items, but both approach, the solutions I acquired had been slightly different and a bit more hostile than once I referred to as owners outside of my area.
I am not saying don't do it, I do recommend it at the right time, but somewhat, take it with a grain of salt and examine for consistency with different franchise owners in comparable markets outside of your area.
You additionally run the danger of that local franchise owner shopping for the territory to protect their expansion desires. So be cautious of operating right down to your local business and asserting that you are going to open one other one nearby. Franchise owners generally is a little territorial.

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