The other day I had lunch with a friend who told me that the company he has worked for the last twenty-five years is closing their doors and he would be out of a job. My friend said he doesn’t want to retire and that he is looking to take some of his severance money to buy a franchise. He wanted to know my thoughts about franchises and whether it makes sense to pursue one. I thought I would share my thoughts with you.

As I explained to my friend, franchises do provide opportunities for people to become business owners. However, as I also pointed out, not all franchises are the same. Just as in the investment world, there are good mutual funds and bad mutual funds; the same thing can be said about franchises. In addition, it is important to remember that what may be a good franchise for me may not be a good one for you.

I told my friend that the first thing he should consider is whether a franchise in general is good for him. It is important to remember that when you buy a franchise, you are buying a business that has its own methodologies, rules and regulations. Some franchises are very strict on how they enforce their rules, other are much more lenient. However, all franchises have rules. Therefore, as I told my friend, if he wants to buy a business where everything is in place, a franchise is something he should consider. On the other hand, if he wants to be more entrepreneurial in how the business runs, then a franchise may not fit his needs.
He told me about the franchise he is looking into, and I told him I had never heard of that particular franchise. I told him before he signs any papers, he better make sure he does his homework. I cannot stress enough that before purchasing a franchise how that they research it inside and out. One area that I think it is extremely important to understand about franchises is the fees involved. Some people think that once you buy a franchise there are no other fees you are liable for. Unfortunately, that is not the case. When you buy a franchise, there are ongoing fees that you will be responsible for. For example, in some franchises, you are responsible for a separate advertising and marketing fee, while some franchises don’t have this fee. The bottom line is that before you get involved it is important to understand all the fees involved and your obligations to the franchiser.

I also told my friend that in doing his due diligence about the franchise that he should talk to other franchisees about the business. You shouldn’t limit your conversations to the franchisees that the company wants you to talk with, rather you need to talk with many different franchisees. You would be surprised how much information they can provide you about the company and its operations.

It is also important that before you buy a franchise you have an attorney who understands franchises, review the legal documents. When you enter into a franchise, you are assuming a variety of legal obligations and it is important you understand those obligations before you sign on the dotted line. Franchise agreements are not easy to understand, therefore, it is important to deal with an attorney who is experienced in franchises.

On the whole, I believe that there is nothing wrong with franchises in that they provide a great opportunity to be in your own business and to potentially be very successful. However, it is always important to remember that not all franchises are successful. There have been many franchises that have gone belly-up leaving their franchisees high and dry. Obviously, that is not the situation you want to be in. Therefore, my advice is that if you are considering purchasing a franchise, take your time, do your research, ask questions and proceed with caution.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.