Take the time you need to make a franchise investment decision

By Rob Bond and C. Everett Wallace

One of the first questions franchisors and franchise brokers ask prospective franchisees concerns their time frame for investing. Your response will be a key determinant of the enthusiasm with which you will be wooed by the franchisor or the brokers that represent them.
Clearly, the preferred response is three months or some equally truncated time frame. If you tell them that you hope to make a commitment within a year, most will put you in a category of “low potential” candidates that most likely will not receive a great deal of attention. Franchisors and franchise brokers alike prefer to focus energies on potential franchisees who will be able to make quick (and possibly sub-optimal) investment decisions. Their feeling is that, the more information available to you as a potential investor—i.e. dozens of alternative franchise systems—the less likely you will invest in their system.
Contrary to this “conventional” wisdom, we would strongly encourage prospective franchisees to feel comfortable in taking up to a year to make an informed and, hopefully, optimal decision. Given that you might be committing your—and possibly your extended family’s—life’s
savings, you should leave no stone unturned in your due diligence process.
For example, it would be very frustrating for you if three months after making your investment decision, you find out there is a comparable franchise that is equivalent in every way, with the exception that the competitor charges only a 5 percent royalty versus the 6 percent royalty for your chosen system. Over a 10-year period, and assuming average annual sales of $500,000, the differential in royalties would be $50,000, a not inconsequential sum. Hopefully, proper due diligence at the front end would prevent such an oversight.
The intent of this article is to persuade you, as a prospective franchisee, to take your time and take full advantage of the many resources that are readily available, at no or modest cost, to assist you in your decision-making process. We have tried to list various resources that you should be aware of. Each will greatly improve your chances of making the investment decision that is right for you.

Franchise Websites
The first resource is the myriad of websites that list franchise opportunities in varying degrees of detail. Noted below are several that provide online details without requiring you to first fill out a questionnaire before providing you with any meaningful information.
* www.MinorityFranchising.com: This website, where there is no charge to franchisors for listing their systems, is designed to promote those franchises that actively encourage the recruitment of minorities into their systems. It includes very detailed profiles on over 500 such franchisors, each noting a breakout of minority franchisees in their systems, as well as any specific programs they might have aimed at minorities. The site is sponsored by 20 enlightened franchisors who want to “level the playing field.”

* www.Entrepreneur.com/franchises: Entrepreneur Magazine provides abbreviated profiles on a large number of franchisors, including unique historical operating unit growth over the past four years. Unfortunately, they have recently reduced the level of detail that was previously provided. For more details, you must fill out a questionnaire.

* www.Franchise.org: This is the website for the International Franchise Association, the industry trade association. Detailed profiles are provided on over 800 members of the IFA. Information about non-IFA members (1,500 franchisors) is not available.

* www.WorldFranchising.com: This site is unquestionably the most comprehensive and up-to-date on-line directory. It provides a very comprehensive directory on over 1,000 North American franchises. One of the key advantages with this website is the ability to sort the universe of franchisors by six different search categories (alphabetically, industry type, average total investment, average franchise fee, average royalty fee and total operating units). If you already know in which industry category you want to invest, you can sort by category and see which other franchisors provide similar products and services. Thanks to a lot of work on the part of FRANdata (www.frandata.com), the franchising industry is broken into 30 primary categories and 227 subsectors.

In addition, there are over 100 websites that are generally considered “lead-generation sites” that list franchising companies with which they have a relationship. Unfortunately, most require you to fill out a questionnaire (of varying detail) before granting you access to any meaningful information about the company. A Google search by keywords such as franchising, franchise, franchise directory, etc. will yield more sites than you have the time or inclination to visit. Among the better sites are www.franchise.com, www.bison.com, www.franchisesolutions.com and www.franchisegator.com.

Books and Publications
on Franchising
The single best investment you can make prior to buying a franchise is to ensure that you know as much about the industry as possible. Prior to spending up to $300,000 or more, it only makes sense to purchase as many books as are necessary to make you an expert on the investment process.
Probably the single best source of industry-specific books is www.sourcebookpublications.com. The site lists over 25 books on franchising, various industry surveys, franchisee satisfaction surveys, etc. Most of the books and reports are current and very enlightening. Alternatively, one can go to www.amazon.com and search for books on franchising.
Among the more informative books are: Bond’s Franchise Guide, the IFA’s Franchise Opportunities Guide, Tips & Traps When Buying a Franchise, “How Much Can I Make?”, Franchising for Dummies, the Minority Franchise Guide and The Franchise Bible.
Monthly magazines that will keep you on top of the industry include Franchise Times (www.franchisetimes.com), Franchise Update (www.franchise-update.com) and Franchising World (www.franchise.org).
Uniform Franchise Offering Circulars,
or UFOCs
Before a franchisor can sell you a franchise, it must first be properly registered with the FTC or various states in which it plans to offer a franchise. The UFOC contains most of the key information you must have before investing.
Most franchisors, however, are reluctant to provide you with their UFOC until you are very close to making an investment decision. If you want to learn more about a company (or, equally important, its competitors) before you prematurely commit yourself, it might make sense to actually purchase their UFOC.
The website www.UFOCs.com offers a very comprehensive and up-to-date database of current UFOC filings, as well as historical UFOCs dating back to the 1980s. The site includes over 20,000 UFOCs for 2,400 North American franchisors. Recent UFOCs are generally provided within 24 hours. Historical UFOCs may take a few days. It is possible to order either an entire UFOC or partial UFOC data. A full UFOC, which varies between 100 and 200 pages, costs $220.

Item 19s
The single most important factor in buying a franchise—or any business for that matter—is determining a realistic and supportable projection of sales, expenses and profits. Specifically, how much can you expect to earn after working 65 hours a week for 52 weeks a year?
A prospective franchisee does not have the experience to sit down and project what his or her sales and profits will be over the next five years. This is especially true if he or she has no applied experience in that particular business. The only authority in a position to supply accurate information about a franchise opportunity is the franchisor itself.
Unfortunately, because publication of an earnings claims statement is at the sole discretion of franchisors, only about 15-20 percent provide this critical information. To the extent that the franchisor commits to inform prospective franchisees with historical data on franchisees or company-owned units (or both), the information is included as Item 19 in the firm’s UFOC.
Again, the website www.ufocs.com is the only source that makes current and historical earning claim statements available to the public. Current Item 19s are $40 each. Packages of historical Item 19s by industry group are also available at a modest cost.

Franchise Consultants
In addition to experienced franchise attorneys and accountants, there are a number of firms that act as consultants to both franchisors and—of equal importance—prospective franchisees. Several of the key firms are noted below. As with the use of any consultant, it behooves you to be as knowledgeable as possible about the industry before asking a consultant to assist you. The last thing you want to do is to pay a consultant to educate you about the basics of the industry.

* iFranchise
905 W. 175th St., # 2 North,
Homewood, IL 60430
708-957-2300
www.ifranchisegroup.com

* FranCorp
20200 Governors Dr.,
Olympia Fields, IL 60461
800-372-6244 + 73
www.francorp.com

* FranchiseHelp
101 Executive Blvd., 2nd Floor,
Elmsford, NY 10523-1316
800-401-1446
www.franchisehelp.com

* Michael H. Seid & Associates
94 Mohegan Dr.,
West Hartford, CT 06117
860-523-4257
www.msaworldwide.com

Franchise Industry Research
In our opinion, there is only one company that provides sophisticated, unbiased, third-party analysis of the franchising industry. In addition to boasting an extremely bright staff of professionals, this company has access to all of the necessary industry data going back to the early 1980s. If a specific question arises that requires access to historical industry data or inter-company/inter-industry analysis, FRANdata is an unparalleled resource.

* FRANdata
1655 N. Fort Myer Dr., # 410,
Arlington, VA 22209
800-485-9570
www.frandata.com

Franchisee Satisfaction Surveys
There are two firms that provide current franchisee satisfaction surveys on various franchise systems. If you are interested in a particular company, you can go to one of the sites below and purchase a report on that company at for a modest cost.

* Franchise Business Review
200 Marly St., Portsmouth, NH 03801
603-552-2747
www.franchisebusinessreview.com

* FranSurvey
P.O. Box 6385, Lincoln, NE 68506
800-410-5205
www.fransurvey.com

Take your time in making what might be the most important business decision of your life. Most of the resources listed are either free or low cost. To the extent that you take advantage of them, you will be better prepared to understand what you are getting into. Most importantly, you will avoid being pressured into making a premature decision without all the facts.
Do your homework. Be fully informed. Take your time and ensure your success.

Rob Bond and Everett Wallace are co-founders of the National Minority Franchising Initiative (www.minorityfranchising.com), an effort to increase the number of minorities in franchising. They can be reached at rob@worldfranchising.com and cwallace18@nc.rr.com, respectively.