Friday, June 03, 2005

Spotting Red Flags in Franchising

Recently a caller asked, "What are some of the most common "red flags" that should warn one away from a particular franchise system?"

My reply: While the Franchise Doctor believes that buying a franchise is the best business decision for most aspiring entrepreneurs, there are some systems that seem to disregard the needs of their franchisees.

A quick check of their "corporate culture" can be as simple as measuring the time needed to respond to your inquiries. If calls from a buyer are not returned promptly and courteously, you may have discovered a lack of attention to their franchisees.

Another way to analyze their culture is the system's approach to their fee structure. Some systems charge very high licensing fees (up to $50,000!), then "pile on" fees for using their proprietary computer software (to $15,000 per year) and then demand 8 to 10% royalties on every dollar you produce. While their salesman may provide a great pitch that these fees will not slow your growth, we've found that most franchisees feel these fees are a heavy burden 2 or 3 years after opening.

A very critical concern is called infringement. When a franchisor sells many franchisees the rights to open within a small geographic area, customers will typically frequent each unit equally and therefor reduce sales in each. Some food franchises now grant a license to operate "within these walls"--clearly warning that another unit may be placed across the street. Some food franchises today sell their products through grocery stores. If a consumer can buy frozen tacos or gourmet ice cream at the store, will they frequent your unit more or less often? The franchisees of Taco Bell and Ben & Jerry's Ice Cream seem divided on the benefit/liability of these alternative distribution systems.

Franchisees will usually share their experiences with you if you call and explain your interest in joining their system. If many say they would consider selling their operation at low prices (compared to the start-up investment), you may have discovered a problem. You'll find an extensive list of suggested questions on our Home Page in the article "How Should You Evaluate a Franchise Opportunity?". The clincher is, "If you knew then, what you know now, would you still buy this franchise? Why or why not?"

Do your homework and be sure you're joining a network where franchisees are seen as very valuable partners in the system.