Don Boroian - How to Analyze a Franchise Deal?

A Franchise Deal or a Dud?How to Look Before You Leap

by Judith Rehak

Published: SATURDAY, OCTOBER 14, 2000

THINKING OF taking early retirement but not ready to leave the business world? Tired of working for a company in which all the decisions are made for you? Just starting a career?

If you are in any of these situations, you might be cut out to become a franchise owner. But you ought to look before you leap. Franchising ideas abound, and not all of them are winners.

There are several ways to research the possibilities. For do-it-yourselfers, one approach is the Internet; most of the major companies have Web sites. The International Franchise Association — which represents franchisors and franchisees — has an extensive one, with sections such as "Franchising's Popularity Attracts Thousands, But It's No Sure Thing," including tips on what to look for, exhibition listings, legal assistance and contact information on its offices in 51 countries. Another helpful source, even for international franchise seekers is "Franchise and Business Opportunities", a publication from the Federal Trade Commission, the government watchdog for the American industry.

There are also companies that specialize in helping individuals find the right franchise fit. "We try to take the emotion out of the process," said Joe Mathews of The Entrepreneur's Source in Southbury, Connecticut. "People don't want McDonald's, they want the results."

Some franchisors take a prospective franchisee through a decision-making process. One is Coffee Beanery Ltd., which is based in Flushing, Michigan, and has 200 outlets.

"The candidate works with the team to discover if they would like to be a franchisee," said JoAnne Shaw, the chief executive, "and there is due diligence on both sides before anyone is paid to be sure it will be a long-term relationship."

Once you zero in on a particular franchisor, you should expect it to provide you with a disclosure document that provides what you have to invest and pay in royalties, what you can expect in the way of service and support, the history of the company and its executives, and financial statements.

Would-be franchisees also need to ask themselves some questions. "You must have sales ability and management skills," said Don Boroian, president of Francorp Inc., which helps businesses become franchisors. "If you don't, it won't work, no matter how good the franchise is."

Other important attributes for a successful owner are determination and a willingness to learn, Mr. Mathews said. One of the most frequently heard warnings about owning a franchise is that one must be prepared to spend long hours on the job in the first year or two.

Of course, the amount of money you can put into a franchise will dictate what you can do, although in the United States you may be able to obtain a loan from the Small Business Administration, or even borrow from your company savings plan. A service business that can be run from home or a small office might require as little as $10,000 for the right to use a concept, the system and training, plus $20,000 for equipment, inventory and working capital, but Mr. Boroian said the average is $35,000 for the initial fee, with $100,000 for preliminary expenses. From there, the prices rise according to the industry. "It can cost $1 million to build a fast-food business and half that for a muffler shop," he said.

A franchisee also pays a monthly royalty to the franchisor, from 3 percent to 15 percent of sales, according to Marcel Portmann, director of international marketing for the International Franchise Association. "Typically, fast food has a lower percentage because of labor costs and high rents, while a company in maintenance and cleaning might be at the high end because all you do is clean, while the franchisor does the sales, keeps the books, and gives you a lot of service," he said.

Prospective franchisees should talk with past and present owners of a franchise to hear how things worked out. Most importantly, they should hire a lawyer before signing a franchise contract.