July 2004 — Q: After spending a career with ATT/Ameritech/SBC, I took a buyout a couple of years ago. I am currently doing telecom consulting but have looked at other ventures. I am beginning to believe that most "franchise opportunities" are nothing but veiled scams. There appears to be a franchise for everything one can imagine — including a franchise to help other folks find the right franchise!! How does one go about determining is the franchise is legitimate? — Bruce, Chicago
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A: It does seem like many franchises are structured to enrich the franchiser, not the people who actually take the risk and do the work. And even those franchisers that are dedicated to growing their business face long odds: according to a 1996 study for the U.S. Small Business Administration, most franchise businesses fail. There are certainly plenty of examples out there where franchisers have gotten wealthy (car dealers or McDonald's come to mind), but for every winner there are many more that sink without a trace.
That SBA study, though, identified several characteristics shared by successful franchise businesses. Among other things, the report recommended looking for franchises that are growing faster than the rest of the pack and that are devoting most of their energies to expanding the system and not spending a whole lot of time and energy getting individual franchises up and running. (That's your job.) To help separate the scammers from the real deal, the report suggests you check to see the business is registered with state authorities or is a member of the International Franchise Association.
You'll also need to ask some fairly basic questions and, if you don't get straightforward answers, move on to the next opportunity. Does the franchise have a clear, viable market? What is the barrier to entry from competition? How much marketing and promotion is the franchiser committed (in writing) to do? What guarantees do you have that your territory won't be invaded by new franchisees? How much cash do you need tied up in the business (over and above any franchise fees)? What's the average turnover and profit margin? How much is the franchiser marking up merchandise before you sell it? Most of all: will they let you take a hard look at the books of several established franchisees (of your choosing) to get a realistic appraisal of how successful these businesses are (or could be with smart management)?
One other major problem to consider: the skills you need to be successful in running a small business franchise are not the same as those needed to evaluate one. For that you need to find a good accountant or business broker you can trust who (for a fee, of course) will help you evaluate these ventures before you take the plunge. This is similar to having a mechanic look over a used car, or a house inspector checking out a home you might purchase. It's money well spent.
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