AKRON (June 10, 2002) - As an independent tire dealer, are you thinking that a franchise outside your main field—say, in auto parts, or auto rental or transmission service—could boost your business?
The advantages to a non-tire franchise are obvious: expansion into new business areas, brand-name recognition, built-in goods and services, advertising support, help with training. But those who go into a franchise agreement without doing their homework can find themselves in deep trouble, according to experts in the franchising business.
“In my opinion, the biggest mistake most potential franchisees make is assuming that the franchise business is federally regulated,” said Michael Childs, a franchise buyers' agent based in Fort Worth, Texas.
It is true that the Federal Trade Commission requires franchisers to provide Uniform Franchise Offering Circulars, which contain the specific franchise agreements, to all potential franchisees, Mr. Childs said. But the UFOC in fact is more of a protection for the franchiser than the franchisee.
“The franchise might be an honest deal that's just not right for you, or it might be a total fraud,” he said. “But when the franchiser gives you the UFOC, and then you sign the contract, he can say, 'We complied with FTC regulations, and now you can't sue us.'”
Besides doing the requisite homework and reading the fine print in franchise agreements, franchisees need to make sure they understand the businesses they're adding on to their existing operations. “In the auto industry particularly, lack of experience can be the death of the franchise,” said Robert L. Purvin Jr., chairman of the board of trustees of the American Association of Franchisees and Dealers (AAFD), based in San Diego.
If you're adding a franchise to your existing business, that necessarily entails more questions than if you buy a stand-alone franchise, noted Lewis Rudnick, a partner in the Chicago law firm of Piper Rudnick.
“You'd have a full range of issues related to the experience of the franchiser, the level of service you can expect, the advertising program, the quality of field service, whether the franchiser offers continuing training and whether there's a chance for franchisees to talk to each other,” Mr. Rudnick said.
Some of the major questions potential franchisees should ask themselves are:
Can you afford it? According to Mr. Childs, the average initial franchise fee—as gleaned from a poll of U.S. franchisees in all areas of business—is $23,400. In addition, franchisees can expect to pay 5 percent of gross receipts to the franchiser, as well as an advertising support fee for local or regional advertising that can range from 1 to 7 percent of gross receipts but usually comes in at 2 percent.
How forthcoming is the franchiser in your requests for information? By law, Mr. Childs noted, the franchiser must provide you with a copy of the UFOC. But many franchisers are reluctant to do so before potential franchisees visit corporate headquarters.
There may be sound reasons for franchisers to refuse to offer the UFOC before a visit, Mr. Childs said—for example, to check out potential franchisees. But since you want to keep your costs to a minimum unless and until you sign a contract, you should always demand to see the UFOC before visiting the franchiser's HQ, unless it's an easy trip.
It also is vital to read thoroughly the UFOC of every franchiser you contact. “People assume that all UFOCs are the same,” Mr. Childs said. “Nothing could be further from the truth.”
Should you go through a broker, or deal directly with the franchiser? There are brokerage services that offer their services free to potential franchisees, Mr. Childs noted in the “Frequently Asked Questions” portion of his Web site, www.franchisebuyersagent.org. But although they promise to find a franchise that's a perfect fit for you, their real interest is in getting their fees from their franchiser clients—usually a flat fee of $10,000, or else 40 percent of the franchise fee.
“You're going to do all of the investigative work anyway,” he said. “Just like you would (or should) if you were looking on your own.” Sometimes, however, in your own investigations you will find a promising franchise offer that turns out to be through a broker. “Not considering a franchise that may be right for you because of broker representation would be akin to not buying the house of your dreams because there is a real estate agent involved,” he said.
What value will the franchiser offer you? On its Web site, www.aafd.org, the AAFD offers its Franchisee Bill of Rights, a statement of the rights franchisees should demand in a franchise agreement. It also has a list—“8 Things to Look For in a Franchise”—which lays out the basic features of a solid franchise.
Boiled down to basics, you should be looking for a franchiser who supports the Franchisee Bill of Rights; who is interested mainly in selling quality products and services, not the franchise itself; who uses franchisees as his primary mode of distribution; and who owns a well-accepted, recognizable trademark.
“If you're trying to reduce risk, it's absolutely essential to have a well-accepted trademark,” said Mr. Purvin, who helped write both the Franchisee Bill of Rights and the “8 Things to Look For in a Franchise.”
Sometimes a start-up franchiser will have a tempting offer for business people who want to get in on the ground floor, according to Mr. Purvin. Such arrangements can be fine, he said, as long as you realize the risks you're taking.
“Ground-floor opportunities are ground-floor because they're not proven,” he said. “Trademarks are proven. Most people buy franchises because they're trying to reduce the risks of running a business, not increase them.”
What will the franchiser demand of you, besides fees and royalties? As with any contract, the fine print in a franchise agreement can be a killer, experts agreed. There are plenty of items you might not think of that might end up as integral parts of the agreement.
For example, some franchisers demand the right to inspect franchisees' operations, and not just those that pertain to the franchise, according to Mr. Rudnick.
“Some franchisers are particular about what the franchise looks like, and they may obligate the franchisee to keep all his operations up to certain standards of cleanliness,” he said. “Then there also are issues of insurance—possibly the franchiser will require a different insurance program than a tire dealer usually has.”
Generally, a franchise agreement lasts for 10 years, after which the franchisee must renew. “People think 10 years never comes,” Mr. Childs said. “But if you're still alive, it does.”
The franchiser may set conditions for renewing the agreement, such as a requirement to completely remodel the store to fit the franchiser's new design, or upgrade existing equipment.
“If you had to build the store from scratch, chances are you haven't amortized that cost after 10 years,” he said.
Franchisees also need to watch out for the “tremendous trap” of termination and non-competition clauses, according to Mr. Childs.
Franchisers can terminate franchise agreements essentially for any act of non-compliance on the part of the franchisee, from failure to pay advertising fees to failure to keep the premises clean.
Whether that occurs, or whether franchisees choose not to renew an agreement—even for failure of the franchiser to live up to his promises—the non-competition clause takes effect. Under that clause, for a set period of time—usually two years—the franchisee may not compete against his former franchiser in that particular line of business.
This clause can really hurt you, Mr. Childs said, particularly if, say, the franchiser defines selling tires as any part of his business, even if it wasn't part of your franchise agreement.
How can you tell if the franchise is right for you? This is a wide-ranging question, covering not only what the franchiser is willing to do for you but what he demands in return. This includes the working environment you have; the sort of people you have on hand and/or plan to hire; whether you are similar personally to franchisees who are already successful with this product or service; whether you want to make this a lifetime business; and, above all, whether you honestly enjoy this kind of work.
“I know of one very successful guy in corporate America who bought a retail store,” Mr. Purvin said. “The problem was, he'd forgotten how much he hated dealing with customers, and he ended up getting out.
“Another guy retired from the Air Force with a mechanical background, bought a transmission store, but he knew nothing about transmissions. He got good after seven or eight years, but he didn't have the bays paved with gold that he anticipated.”
The AAFD, a non-profit association, offers a full range of services to its members, who are franchisees across the full range of U.S. business. Mr. Childs, besides offering his services as an agent for franchise buyers, also has written a book, “The Franchise Buyer's Guide & Workbook,” which he sells for $149 per copy.
The book walks potential franchisees through the complete franchise process, including tips on how to spot the right franchise, a guide on understanding the UFOC and checklists covering every salient point of the process.
“I kept it as simple as possible,” Mr. Childs said, “and I had trouble keeping it to 325 pages!”