Do you think buying a franchise is an easy way to make money while you sleep at night or enjoy your day without having to go to the office? Or do you think purchasing a franchise will eliminate the issues I’ve experienced as an independent business owner? I’ve seen franchises fail too within the first year of business.
Many years ago I was sitting in a coffee shop and could not help but overhear the conversation of the two men sitting next to me. We were in a strip mall on the corner of a major intersection. Only those driving north or east could conveniently enter into the parking lot. Those driving south or west would have to attempt left turns in front of lots of on-coming traffic to shop in this mall. I’ve vacationed many times in this area and while visiting this location, I witnessed many traffic accidents. It would not be my first choice to rent space for a business relying on drive by customers.
The gentlemen next to me were in heated discussions about a new franchise ice cream store located in this mall. The franchise owner kept stating, “but you told me this is a good location!” It appeared the other gentlemen worked for the ice cream company who sold the franchise. I could tell this new franchise owner was not very happy.
A year later, I returned to the same location and I noticed the ice cream shop was closed. The space was empty and again available for rent. A sad story, but not any different than 20% of those first year business owners that fail.
In addition to location, many factors should be considered in purchasing a franchise. My brother was planning to open a fast food restaurant. As part of his location research, he visited all the fast food establishments including franchises, within a 5 mile radius of the building he wanted to rent. He was researching all of his potential competition in the immediate vicinity. But what surprised him through this exercise, was the talent of potential employees available in the area. While he was purchasing a sandwich at a franchised sandwich shop during a busy lunch hour, the power went out. The young clerk had a long line of sandwiches to make and continued to work with just the outdoor light coming in through the windows. When his sandwich was ready, my brother wanted to pay with cash. ‘Sorry, I don’t know how to make change”, was what he heard when handing over a $20 bill. With the power out, the cash registers were not operating to calculate the amount of the correct change. So the young clerk did the next best thing, she gave away the sandwiches for free. When my brother interviewed employees for his restaurant, he required that each applicant take an actual ‘how to count money’ test. Those that failed, were not hired.
Even with the best location and well trained employees, many other factors can force a franchise owner out of business.
In the book called “The Franchise Fraud” written by Robert L. Purvin, Jr.[i] Robert refers to the questionable statistics franchise companies use when selling their franchises. They all make it sound like it’s easy to successfully own your own business. He particularly refers to a study that uses the United States Department of Commerce claims that franchising ensures business success. However, Robert continues to state that this study has serious flaws.
Many years ago I managed an online small business group for women business owners. I asked business owners to share their experiences, both good and bad, with my members so they could learn from those who did it before them. One former business owner shared her horror story in purchasing a franchise of an art framing business. Within a short time after her purchase, the franchise company filed bankruptcy. She hung on as long as she could and tried to make her business a success, however, she too filed bankruptcy.
The frame store franchise owner researched her purchase with lawyers and accountants. Despite their objections, she purchased the franchise anyway. Perhaps she would have had second thoughts if she took a few additional research steps.
So how do you avoid making these same mistakes and successfully purchase a franchise? These are the steps I would take before I would consider purchasing a franchise.
First, I would talk to other business owners who bought the same franchise. Even if I would have to travel to other states and cities to meet with them. I hoped they would share their real experiences and outcomes. Primarily, are they making the profits they expected? If possible, I would try and get a job in one of these franchises. This will tell you exactly what to expect and test what goes on behind the scenes.
For the next step, I would research and create a business plan acting as if I would start a brand-less business to compete against this franchise to determine exactly what it would take to succeed. Basically to determine if paying customers would come to you even though you do not have a branded franchise name to back your company. You should answer the question, “ what is this franchise really providing me?” If you are considering a franchise purchase, complete a business plan to compete against that franchise.
[i]The Franchise Fraud, Robert L. Purvin, Jr. 1994, ebook edition American Association of Franchisees & Dealers