Evaluating Franchise Investments

Millions of people dream about owning their ownnormal five-day, fourty-hour work week? Life is too
business. Having the independence that being yourshort for the seven-day, sixty to eighty hours a week,
own boss brings, the security that no one can fire you,workaholic lifestyle,that can destroy health, family and
enjoying a good income - and for the most successfulpocketbook. Financially, the true hourly rate for
- the accumulation of wealth and prosperity.franchise owners who work these workaholic hours is
Unfortunately, the cards are stacked against a newoften less than minimum wage.
small business making it big - or making it at all. AnMinimum Number Of Employees
endless stream of problems makes competition fromCan you operate the business with five or fewer
large, sophisticated chains just too intense. Most newemployees? Managing dozens (or hundreds in the
start-ups end as failures.case of some fast-food operations) of minimum-wage
Franchising represents a more viable approach toteenagers who are constantly quitting or simply not
business ownership. For a price, the parent companyshowing up for work is a sure formula for stress.
teaches its proven business methods to theLeasing And Location
franchised-operator who shoulders all operating andFor most retail franchises, the triple net lease of the
financial responsibilities of the outlet. The statistics arelocation is the biggest financial commitment, larger than
impressive: over 40% of all U.S. retail sales are throughthe total franchise investment. Yet, the typical real
franchised establishments. While giants like McDonalds,estate lease and its ramifications are not required
H&R Block, 7-Eleven and Radio Shack are familiar,disclosure in any Franchise Offering Circular (FOC). For
household names, franchises are available in a wideexample, an estimate that you'll need 2,000 sq. feet of
range of industries. The list of 3,000-plus franchisespace with expected rental of $5 to $10 a foot per
companies span over 100 different categories. But justmonth is normally disclosed in the FOC's initial
as franchising represents a chance to get rich, it's alsoinvestment table as Leased Real Estate $10,000 to
a chance to get stung. An alarming number of$20,000. A footnote to the investment table may say
franchised operators make less than the minimum"assumes 2,000 sq. ft. at $5 to $10 a foot." But, that's
wage, working seven days, sixty to eighty hours aonly the beginning of the story. The lease is normally a
week, pursuing an expensive and elusive American5 to 10 year triple-net lease. So, the financial
Dream that turns into a nightmare.commitment made when the lease is signed is at least
What follows is a bottom-line check list of tips$600,000 (at $5/foot for 5 years) to $2,400,000 (at $10
compiled from leading franchise experts that will helpfoot for 10 years). And this doesn't include substantial,
you eliminate 95% of the companies you areadditional obligations to pay all of the landlord's yearly
considering. Then, you can concentrate your efforts onproperty taxes, insurance, common area operating
the 5% "cream" of the crop" companies that deserveexpenses, etc. Key questions to ask here: (a) is the
consideration. This check list assumes the franchisefranchise you're considering one that can be operated
company: (1) has itself successfully operated thein a low rent commercial business zone? Avoid
concept being franchised for at least five years atfranchises requiring the costly expenses and triple-net
multiple locations; (2) is not plagued by litigation orleases of a visible retail storefront and the extravagant
complaints from disgruntled franchise owners; and (3)rent associated with areas of high foot traffic, like
has a balanced, fair franchise contract.shopping malls or strip centers. You'll sleep much better
Industry Trendat night. (b) What's your total financial commitment
Is the franchise in a cutting-edge industry that is doingunder the lease? (c) Do you have sufficient liquid
well currently and is projected to do well in the futureassets (or a willing, sufficiently liquid third party
despite any economic slowdown? Education andguarantor) to meet the landlord's lease qualification
home-improvement services are stable categories.standards? If you don't, you might as well forget about
Food is over-saturated generally, and except ininvesting in the franchise. Or even worse, getting
exceptional circumstances, is not worth the highinvolved in a questionable franchise, realizing you've
investment, headaches and marginal income.made a big mistake - only to discover you're on the
Total Initial Investment Requiredhook for a $500,000+ lease obligation.
In general, don't expect a franchise that requires aImage And Lifestyle
five-figure initial investment to produce a six-figureHow does flipping burgers, scooping ice cream or
income. As with most things in life, you get what youcleaning restrooms fit the image of what you want to
pay for. Is the total initial investment range (includingdo for a living? Investing in a franchise will be the most
working capital) $125,00 or less; and the maximumimportant psychological and financial decision you ever
investment less than $200,000? You can find solidmake. Does the typical working day of the franchise
companies in this investment range if you're willing toyou are considering fit your personal image and
look around. Don't forget to consider long-term financialdesired lifestyle?
commitments, particularly the real property lease (seeFranchise Brokers
discussion below under "Leasing And Location").Does the franchise company have its own in-house
Real Businessmarketing department, or does it utilize outside
Is this a legitimate retail business, as opposed to afranchise brokers? The use of franchise brokers is a
"work out of your home" operation? The vast majoritydefinite red flag. First, it indicates the franchise
of work out of your home concepts produce marginalcompany is not very serious about who it lets into the
income at best.franchise network (or even worse, they're desperate
Management Expertiseto sell franchises). Second, franchise brokers receive a
Does the management team have executives withsubstantial commission up to 50% or more of the
demonstrated past achievement and experience infranchise fee you're paying the franchise company.
operating other franchise companies? If not, this is aThey definitely do NOT have your best interests in
big RED FLAG. Many companies enter franchising andmind and will do whatever they can to close a deal.
fail to realize they are in a brand new business - oneThis accounts for the common observation that
requiring entirely different management skills andfranchise brokers tend to give glowing
abilities. If the management team lacks strong franchiserecommendations for all franchises they represent. A
credentials, you might as well take a trip to Las Vegasdetailed analysis often reveals these highly touted
with the money you're intending to invest. Yourfranchises produce mediocre or even below minimum
chances of making vs. loosing money are roughlywage financial performance. Yet franchise brokers
equal.won't mention this, and individuals continue to rely on
Normal Working Hours And Days; Sufficient Incometheir recommendations, believing the broker represents
Levelthem. Nothing could be further from the truth.
Will the nature of the business allow you to work a