I frequently get letters from readers about acquiring a franchise. Any franchise, whether it relates to marketing or not, needs to be approached with a great deal of caution and common sense. This article is not the definitive "how to" in this area; but if you follow these steps, you will have avoided several of the not-so-obvious traps and pitfalls that cause prospective franchisees lots of trouble. Start with all the documents the franchiser must, under Federal law, provide. Read them carefully. Get your attorney to look them over too. Don't use your regular attorney, though. Pick one that has a verifiable track record in franchise law.
You need someone who really knows the ins and outs of this particular field. Take a look at the market for this franchise. Go to all the major search engines, including Google, Yahoo!, Ask.com and the others. Take the time to do your due diligence. Find out how many people have looked up the key words associated with this company or service in the last six months. How much interest is there in this field, this service and this particular company? Immediately open up news alert accounts with both Google and Yahoo. Start monitoring what is being written about "franchising" in the media on a daily basis. Check out chat rooms and related forums.
Go to popular online article directories like EzineArticles.com and look up the word: "franchising". You will find dozens of articles written on this topic there. Register with them to be alerted and sent every new article they publish on that topic. These are free services. Immerse yourself in the language, strengths, weaknesses, opportunities and threats related to this specific service and firm. Google the key officers of the franchiser. Find out more about them and their respective backgrounds. Look for any past lawsuits by disgruntled franchisees. Under law, this is supposed to be offered transparently in the disclosure documents the franchiser must give you. If this firm has been sued repeatedly, beat a path to the nearest door. Now continue your due diligence, by being the ultimate mystery shopper. Track down the franchisees of this system who are NOT on the list to contact given to you by the franchiser.
Often there are "under-the-table deals" that have been made whereby a favored franchisee tells prospective new franchisees how wonderful the system and the franchiser are...in return for unspoken favors. I know this is true, it has happened to me. I have been deliberately lied to many times by existing franchisees I thought I could trust, wanting to curry favor and benefits from the head office. Talk to some of the disgruntled franchisees who have quit the system or sued the franchiser. (If you would like to see and hear more about what NOT to do when assessing a potential franchise opportunity, click on the live link in the credits section below).
Talk to the customers of some of the existing franchisees. Figure out a way to "interview" them, without kicking up too much dust in the marketplace, drawing any attention to you or to the existing franchisee. Also get some answers from the customers of this service and system. Find out what they like best, least, how the franchisee has handled problems in the past, what is best about their system, how they compare to others in the marketplace they have used; and finally, learn if they will continue to use this franchisee/service; and why, if not, why not? Now do your number crunching. Take three different potential outcomes in terms of sales and the profits derived from each sales level. Use "optimistic", "pessimistic" and "most likely" results. Take the probability of each of these different events occurring.
For example, if your optimistic profit level was $ 5,000 and you feel there is a 25% chance of gaining this result, then take 0.25 times the $ 5K, and add it to the 60 % (0.6) times sixty percent of the expected results of $ 10K; and finally add that to the 15% (0.15) chance of earning the pessimistic result of $ 2K. The resulting math goes like this: .25 X $ 5,000 + .60 X $ 10,000 + .15 X $ 2K = $ 7,550. This number is the combination of the probabilities of three different events occurring. This is your most likely expected value of these events. Put bluntly, this is what you'll likely earn in this situation.
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