23 Nov

Don’t Let A Franchise Business Opportunity Give You Brain Freeze

By Kevin J. Palmersheim

November 23, 2015

A few years ago someone asked for my thoughts on buying a frozen yogurt franchise. Well, actually I was asked for my thoughts on a “Froyo” franchise, but I had never heard that term before. I developed this image of a hobbit throwing his ring into a volcano of frozen yogurt while chanting, “my precious.” Fortunately, my brain freeze was only temporary.

I frequently receive questions regarding particular franchise opportunities. I can’t help but try to convey the wisdom of Gandalf, which I now share with you in no particular order:

1. Franchises often provide an easy, turn-key opportunity to go into business for yourself. The required planning, setup and learning curve for new businesses are common barriers to an otherwise entrepreneurial spirit. A good franchise can overcome that barrier and open up ownership for people. So when you want to start your Mars Travel Company franchise, your franchisor will give you every-thing you need to know about nuclear rocket technology and biosphere living conditions so that you will be an expert the first day you launch.

2. If you are analyzing different franchise opportunities, one of the first steps should be an online search of the franchise – many franchisees have blogs or discussion sites to talk about the good and bad with their franchisor. Similarly, call franchisees from other geographic regions – ones that were not referred to you by the franchisor, so the information is not one-sided.

3. If you are analyzing the Milwaukee Brewers franchise, one of your first steps should be to acquire a bullpen that does not habitually blow 9th inning leads.

4. Every legitimate franchisor is required by state law to provide you a document called a Franchise Disclosure Document (FDD) that contains disclosures regard-ing the franchisor and its owners, anticipated startup and operation costs, and on-going payment and other obligations. At first blush this document seems impressive, but only a small part of it is actually useful. For an example of parts that are not helpful, the estimated costs section usually gives you a range that in-forms you that your business startup and operational costs will run somewhere be-tween $1.00 and a pile of gold the size of Mount Doom (and then, despite the vast range, it will say that your actual costs may vary).

5. But ask a potential franchisor for a FDD, and read it. (You can also check to see if the franchisor is registered with the Dept. of Financial Institutions. www.wdfi.org — click “I want to search,” then “franchise registrations.” If registered, the franchisor will have an FDD that may be downloaded from that site). See if the owners have previously filed for bankruptcy. Identify how many franchises currently exist, and how many have closed after opening. By doing this, you may discover without the brilliant assistance of others that the Bernie Madoff Money Management Franchise is probably a bad idea.

6. The biggest complaint I see with franchisee clients is that after the startup, and after operation for a year or two, the franchisee begins to resent the fact that she is still paying royalties and fees to the franchisor and is not receiving much of value in return. For example, after you start your “Doggie Poop Pick-Up” franchise and learn the ins and outs, so to speak, you will wonder why you are paying the franchisor 2-10% of your revenue when it is you who is picking up the daily …slack. So, make sure you know what ongoing services and support you are getting from your franchisor and analyze before buying whether the knowledge to do this business could be obtained more cheaply from other sources so that you could start your own, non-franchised biz.

7. Determine from the FDD how the franchisor makes its money. Usually the financial statements convey some of this information. Are the franchisor’s revenues primarily from the initial franchise fees? If so, after you sign up the franchisor’s primary focus will not be your success but instead selling the next person a “left-handed umbrella franchise.” The flip side of this analysis is identifying whether more of the franchisor’s income is derived from ongoing revenues, and yet the franchisees appear to be happy business people?

8. Pick an opportunity that is not based primarily on money, but rather something you would have fun with. If it is not fun or at least positively challenging, no amount of commercial success will overcome the soul-sucking feeling of your new venture.

Like I said, franchises provide good opportunities that are not otherwise easily available. We have a number of happy franchise clients. We also represent a number of franchisors, and draft those extensive Franchise Disclosure Documents and franchise agreements. Un-fortunately we often get involved when the franchise relationship goes sour, and observe why that came about. From my perspective, it is best to be Samwise when it comes to franchise business opportunities, do your homework, and consult with a knowledgeable attorney before finding yourself on a path to Mordor and financial mayhem.