Did you just come from a franchise exposition wondering whether you could really believe everything you heard?
Join the crowd. Today you can purchase a franchise to sell just about anything from fast food to gift baskets to super car wax to gumball machines, and every one of the offerings promises you a rich and rewarding future.If you're not careful, the reality sets in only after you lay out your hard-earned money only to discover those riches come at quite a price.
Here are some tips on evaluating the offers:
- Money: Ask the person offering the franchise to tell you the total costs of starting your business. Better yet, ask them to supply that information in writing. The franchise fee is often just the start of your expenses. In addition, you may have to lay out money for office equipment, rent and utilities (plus a deposit), basic supplies, telephones, possibly a computer, billing software, signs, stationery, business cards, Yellow Pages advertising, maybe a start-up inventory, transportation (if you go to the customer), insurance and many other unforeseen start-up costs.
- Support: Each state has a set of franchise rules, which anyone offering a franchise must abide by. But just because the franchisee abides by those rules doesn't mean they offer complete and comprehensive startup and operating help. Again, ask for proof in writing on exactly how they will help you get started, then how they will continue to help you to succeed.
- Location: Ask any real estate person: The success of a walk-in customer-based business depends on location, location, location. If you are offered a franchise where the franchisee picks a "desirable" location, ask for both a demographic and psychographic analysis before you sign on the dotted line. A cursory study of your city can produce a dozen locations for an ice cream shop based on demographics (income, population, age, marital status, etc.), but a psychographic analysis (hobbies, lifestyle, attitudes and so forth) could show that not many people in that area would drive to your specific location to buy ice cream.
- Promises: "Our new model 5644G monster gumball machine with the flashing neon, stereo sound and digital graphics will draw hundreds of users. Here's proof." You are then offered a letter or statement showing how a profit of 1,000 percent was made at one location in one month.
The statement will be true, but what you are not told (except in fine print) was that it was the first machine of its kind, that it was the only one at that particular location and that, in addition to paying for the cost of goods, the amazing profit was eaten up by depreciation, insurance, location fees, vandalism repair, theft, service time and a host of other hidden costs. Plus the fact that there are already three competing gumball machines at most of the locations in your town, so the most you could hope for would be 25 percent of the market share, not 100 percent.
- Proof: "Here's a list of five people who will vouch for what we say." If this is what is offered, and you feel the franchise is a possibility for you, ask for a list of 25 users, then call each and every one of them. Practically anything can work somewhere, at some time, by someone. What you want is proof that a person like you can succeed. If you don't get the list, move on.
- What to do: First and foremost, don't believe anything that is not in writing, and view even that with a critical eye. Read and believe the fine print. If the franchise company cannot or will not provide you with written proof of everything their salesperson says, forget it - it isn't true. Second, write to the Better Business Bureau in the city where the home office is located and ask for a list of complaints on the parent company. Ask how problems are resolved.
If the BBB will provide names and phone numbers of the complainants, call to verify the story. (Note: Some BBBs charge a nominal sum for the information. It's worth it.)
- Final words: Please don't get the idea that buying a franchise is a ripoff. Most are legitimate and honest and will provide you with everything we've discussed. The benefits of a franchise are many, including a proven way to get started, help with the business side of the business and lots of hand-holding when you need it. Just don't fall for a fast-talking sales pitch on a marginally profitable business.