The Process of Buying a Franchise from 30,000 feet

Here is a simplified version of the process of buying a franchise.  While some franchises have very different process, most follow this general flow.

1. Personal vision & goals

Before you start surfing the net for the thousands of franchises available for your purchase, you should develop a clear plan for yourself.  Without a clear set of goals that you're working toward, you are at risk of having a clever franchisor define your future for you.  There are a number of considerations that you should assess as well as discuss with family and friends:

• Define the lifestyle that you're trying to achieve; not just after you're rich and successful, but the lifestyle while working and striving to reach success.
• What are your key capabilities that you bring to a new business?
• What are your weaknesses that must be provided by either the franchise or other players (e.g., partners, employees, managers, etc.)?
• Am I trying to replace my current income with more stability and security?
• Am I trying to build a business that someday I can sell for a multiple of revenue?
• Given that no business succeeds without great selling and marketing, what do I bring to the party and what do I should I look for from a franchisor?
• Do I possess the risk tolerance to be an entrepreneur?
• How much control do I demand and therefore am I an ideal candidate for a franchise?
• Do I have the motivation and energy necessary to start and build a new business?
• Do I possess the personal accountability for my own mistakes and issues, or do I look for others to blame?
• Is my family supportive to survive a period of little or no income coming in and lots of expenses going out?

If in the opinion of your family and close advisors you're not entrepreneurial material, swallow your pride and pursue an alternate course.  Starting a business (franchise or not) carries considerable risk and a misguided attempt to become self employed can be very expensive and emotionally damaging.

2. Franchise research

Now that you have a general plan, you can begin the process of trying to find a franchise concept that fits your goals.  This can be a very challenging process given the thousands of choices available.  This where a franchise advisor can be very beneficial.

The internet is a great source of information and alternatives.  Be forewarned that if you request additional information at any of the franchise opportunity web sites, your contact information may go to a number of franchisors who may then flood you with unwanted offers.

At Franchise North America, we never forward your contact information without your prior agreement.

There are a number of franchise expos held annually where you can research a number of franchises all in one room.  Go to www.franchise.org for a schedule of their East Coast and West Coast expos.

In addition there magazines and newspapers that regularly have features and advertisements for franchises.  Inc and Entrepreneur Magazine are two good ones.  The Wall Street Journal on Thursdays and USA Today on Wednesdays feature the franchise industry.

3. Franchisor contact

Through whatever means you will eventually talk with a franchise sales representative on the telephone.  This phone call is a preliminary screening process for both you and the franchisor to determine if this match makes sense.

Remember, the franchise buying process is a mutual decision.  The franchisor is evaluating you as much (if not more) than you are evaluating them.  Keep in mind, the franchisor has evaluated thousands of buyers; you'll probably only come in contact with only a dozen or so franchisors.

During this initial phone call or calls you'll be focused on two objectives: 1) get a few critical questions or concerns answered, and 2) make an initial decision of whether or not you can work with this company as represented by their sales person.

4. Yes / No Decision

This is the first of several mutual decision points.  Both parties (i.e., the franchisor and you) must be committed to moving forward for anything else to happen.  In short, if you're not genuinely excited or intrigued after the initial franchisor phone call, it's probably not a good fit.

5. Receive UFOC

Provided both parties are committed to move forward, the franchisor will send you (either in hard copy or electronically) their UFOC.  See Uniform Franchise Offering Circular (UFOC) in the Resources section of the web site.  The Federal Trade Commission (FTC) requires that the franchisor give potential franchisees a complete copy of their UFOC at least 10 business days before any contract is signed or any money changes hands.

If there is one critical piece of advice for the prospective franchise buyer it is: read and understand the UFOC.  In addition, prior to buying a franchise, hire a franchise attorney to review the UFOC.

While most UFOCs are lengthy and rather dull, they are relatively easy to read.  It's not a document that only lawyers can understand.  Here's our recommended process of reviewing the UFOC:

• Read the UFOC and the sample franchise agreement without taking significant notes or highlighting
• Print-out the Validation Checklist
• Sit down a second time with the both the UFOC and the Validation Checklist and go through each section (Item) of the UFOC reading and trying to answer each of the questions from the Validation Checklist
• On a notepad, make a list of any unanswered question or material issue from this review
• This list of questions and issues will require further validation either through discussions with the franchisor, with franchisees or through local research

It's great if you're still excited or remain intrigued after reading and understanding the UFOC.  If you're filled with concerns from all the guidelines, rules and restrictions presented in the UFOC, don't be discouraged unless you've read a number of UFOCs.  Nearly all franchises have significant controls; that's how they protect the quality and value of their trademark.  However, if a experienced franchise attorney reviews the UFOC and says that it's unusually restrictive and may limit your ability to be successful, that's reason enough to question the fit.

6. Validation & Due Diligence

Up to this point you've only heard the franchise sales person's point of view of the opportunity the franchise presents.  Just as you'd never buy a car simply based on the car sales person's opinion, you should never buy a franchise based on your emotion and the sales person's input.

Item 20 of the UFOC  lists all current and past franchise owners.  The FTC requires that the franchisor disclose those contacts so that you can verify and validate claims made by the franchisor.  To continue the car buying analogy, wouldn't it be great if when buying a car you had the opportunity to speak with any or all previous car buyers at the car dealership to determine their satisfaction with both the car and the dealer's service after the sale?

This step is THE most important part in the process.  Most or all of the questions and concerns from the UFOC review must be addressed here.  Through current and past owner conversations, plus your own research you will either confirm your interest, excitement and passion for the concept; or kill it and move onto another concept.

However, no one is ever able to gain 100% certainty of their decision.  Validation and the decision to proceed further is typically 90% facts and analysis; and 10% intuition or gut-feel.  Some data-driven people struggle with this notion.

7. Discovery Day

Congratulations, you've arrived at the point in the process where you will have material expenses in buying a franchise:

• You should have paid for a franchise attorney to review the UFOC and sample franchise agreement
• You should have paid for a financial planner to assess your personal finances to determine your available equity to buy a franchise and your on-going needs for paying the bills while you get your new franchise business up off the ground
• Now you are usually required to pay for a plane ticket and hotel room to travel to the franchise headquarters for their Discovery Day

Nearly every franchise has a Discovery Day in their process where both franchisor and buyer have the opportunity to personally interact with each other.  In the end, franchising or business in general is driven by people.  Therefore, both parties are given an opportunity to stare into each other's eyes and make an emotional connection.  Both parties are trying to determine whether they can productively work together for mutual benefit.

If you've reached this point in the process, you should be satisfied with the validation you've received from current and past owners.  Your objective for this trip is to determine if the franchise's organizational leaders have the qualities necessary to achieve success for both you and the entire franchise system now and into the future.

Once again this is a mutual evaluation.  Don't try and be something that you're not during this trip.  Allow the franchisor to assess you and your capabilities; warts and all.

8. Yes / No Decision

If at the end of the Discovery Day visit you have remaining or unresolved concerns or questions, kill it and move on.  You will not get a better opportunity than a Discovery Day to feel comfortable and confident with the franchise.  Anything less than confidence moving forward should serve as a warning sign.

As for the franchisor, their executive team will typically compare notes from your Discovery Day visit and give a "Go / No Go" decision of offering you a franchise to purchase.

9. Franchise Agreement

During the process of negotiating a franchise agreement, you'll rely on the guidance and counsel of an experienced franchise attorney.  A good franchise attorney will have the experience of having reviewed dozens of UFOCs and franchise agreements and therefore know where the real opportunities lie for an fair and effective agreement.  An inexperienced attorney will attempt to negotiate terms and conditions which are simply not negotiable and may result in immediate and possibly long term damage to your relationship with the franchisor.

The ability of the franchisor to negotiate terms and conditions will depend greatly on the relative maturity of their system.  New franchisors may have considerable flexibility.  Older, more established systems will not.  Remember, any material change to the franchise agreement may impact not only your agreement, but other owners as well.  So you can appreciate the franchisor's reluctance in making certain changes.

The most material item for negotiations typically is exclusive territory (where a franchisor offers it).  You may have the opportunity to influence how the franchisor defines your exclusive territory in order to capture the most promising geography.  You might also discuss a first right of offer or refusal on additional territory.

10. Yes / No Decision

Your last opportunity to back out before making a significant financial commitment is before you sign the franchise agreement.  Any potential for refunds on a portion of your franchise fee is detailed in both the UFOC and the franchise agreement.  However, after signing the agreement, you probably face significant penalties for backing out.  The reason is that after signing the agreement and prior to opening your business, the franchisor will invest a significant amount of time, energy, and money toward your training and development.

11. Buy Franchise

Another FTC requirement is that the potential franchisee must be given a separate contract, with all blanks or negotiated parts completed (except signatures) at least five (5) business days before any contract is signed or any money changes hands.

Before buying the franchise (i.e., signing the franchise agreement), you should have already been looking for financing for your new business.  The time to find out that you're unable to borrow money is not after you've signed the agreement.

In addition, you should consider forming a business so that the franchise is purchased in the name of the business, instead of you personally in order to mitigate future liability.  Talk with the franchisor regarding naming your business.  Most franchises will not allow you to use their trade name in your business name (e.g., Joe's Subway of Syracuse, LLC).

Once you have finalized the franchise agreement you'll be expected to pay all or part of your franchise fee, as well as other fees as detailed in the franchise agreement. 

12. Open the Business

Once you have signed the franchise agreement and paid your money, (some say) the work really begins.  Two of the most frustrating parts of buying a franchise are: getting funding and finding commercial real estate.

In addition to successfully completing training, finding a suitable site for your business are typically two additional requirements to buying the franchise.  Without either one, you could lose a portion of fees already paid.

On the other hand, the time between signing the franchise agreement and your grand opening is when you'll realize the greatest value and support from your new partner: the franchisor.

If you successfully navigate through this long and trying journey, you'll arrive at self employment with the greatest feeling of accomplishment and fulfillment.  It's well worth it.