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STEP 3 - ANALYZE AND EVALUATE THE DISCLOSURE STATEMENT

Information contained in the disclosure statement provides a basis for thoroughly analyzing the potential for a franchise. However, it is also necessary to investigate the franchisor to ensure that all information is truthful and accurate. Note the following points about this step:

• Experience of management and directors. The experience of both the management and the directors can be critical to the franchisor's competence. These individuals should have sufficient experience that they can add significantly to your own business expertise. They should have special knowledge and understanding about the type of business operation they are selling.

• Number of franchises in operation. The number of franchisees provides some measure of the stability and experience of the franchisor. It is possible that a new franchisor provides a great ground floor opportunity. However, your risk is reduced when you select a franchisor that has a large number of franchisees. Each franchisee provides the franchisor with added experience in starting new operations. This combined experience will prove highly beneficial in getting your business started.

• Number of franchises no longer in operation. You need to find the number of franchisees who have been closed or repurchased by the franchisor, or gone out of business. This information can be even more important than the number of currently operating franchises. Franchisors will sometimes buy out or close unsuccessful franchisees in order to remove problems. It is important to know how many situations like this have occurred. The more franchisees that have experienced problems, the greater your risk becomes in purchasing a franchise.

• Years franchisor has been in operation. The length of experience often indicates stability and a higher potential for franchises to succeed in the future. However, there are some good opportunities with younger franchisors. Do not let this factor alone discourage you from considering an association with a franchisor.

• Type and amount of training. The type and amount of training the franchisor provides can prove critical to your success. The best training programs will include a combination of classroom training and on-the-job training. There should be a few weeks of training involved for it to be highly effective.

• Type of management assistance provided. There should be a large amount of assistance provided with the start-up of the business. This period of time is normally the most difficult and requires the greatest amount of assistance. However, there should be continued assistance offered regularly, as well as for unexpected crises.

• Financial stability. The certified financial statement provided by the franchisor should indicate a financially healthy organization. Any type of questionable financial problems should result in caution about developing an association with the franchisor.

• Assistance in financing. Determine the assistance that the franchisor can provide for financing your business. Will the financing include the franchise fee, equipment, building, supplies and operating capital? A less reliable franchisor may not obtain financing that will be most beneficial to a franchisee. Be sure to carefully examine the interest rate and loan conditions and have them reviewed by a professional attorney or an accountant.

• Site location assistance. An old expression about retail establishments states that there are three critical elements to business success: location, location and location. While this is an exaggeration, it illustrates the importance of site location. An experienced franchisor should be able to provide sophisticated techniques for accomplishing this task.

• Planning and constructing a building. Assistance in constructing a building can help you save a great deal of money. Find out whether there is any additional fee for this assistance.

• Reputation among franchisees. The franchisor's customers are its franchisees. The best way to determine how you will be treated as a customer and a franchisee is to talk with other franchisees. If possible, try to talk with those who are no longer in business. They can offer a unique insight into franchisor treatment and services.

• Projected operating losses. Determine how long a franchise is expected to operate before revenue will be sufficient to cover expenses. This will help you calculate the amount of funds you will need to raise in order to cover this deficit.

• Potential profits. A critical element in deciding about a franchise is the amount of annual profits that you can expect. Have a cost analysis done to determine whether the projected profit is enough to ensure a reasonable return on investment. You should ask other franchisees whether the profit they make each year is close to what the franchisor told them to expect. Project the length of time that it will take to recover your initial investment.

• Equity requirements. The franchise fee and the capital investment requirements are the biggest obstacles for most potential franchisees. Once you determine your net worth, discuss it with a banker to determine an amount of money that you can borrow. (There are other ways to raise capital, but a loan is perhaps the most common way of financing a franchise.) This information can be used to quickly eliminate those franchisors whose equity requirement is more than you can comfortably finance.

• Interest and enthusiasm. A franchisee needs to be excited and enthusiastic about a franchisor's product or service. There are several reasons for this. One, you will be associated with the franchisor for many years and need enthusiasm for motivation. Also, your attitude toward the franchisor will be sensed by your customers and employees. Your customers will be more likely to patronize your business when they observe your enthusiasm. Likewise, employees will work harder when they are inspired by your excitement.

• Business skills. The franchise should closely match your business experience and skills. The more you know about the business operation, the higher your potential for success. This does not mean, however, that you must have experience with the specific product or service. You should expect the franchisor to provide training and management assistance, but related skills and experience will help significantly.

• Community fit. Many products and services can be successful in one geographic area but may not work well in another. Customs, tastes, traditions, wealth and other factors affect the success of a product or service in a community. Franchisors will sometimes conduct a market survey to determine the franchise's viability for your community. However, you need to verify the accuracy of such a study. Less honest franchisors may attempt to modify the survey's outcome to use it as a selling point.

• Location availability. The importance of location has already been mentioned above. You need to consider how critical location would be to this particular business. Next, it is necessary to determine whether a location suitable for the business exists within your community. If you have doubts about available sites, you should reconsider your investment in the franchise.

• Longevity of product. To protect your investment, the franchise should have long-term staying power. Ask yourself whether the product or service is faddish. To do this, it is often necessary to look past your enthusiasm and be objective about the product or service. Ask the advice of experienced business people. Talk with friends who would be typical of your future customers. These combined opinions will help you predict the product's longevity.

• Population stability. Find out the population projections for the community in which you plan to place the franchise. City government, chamber of commerce, Small Business Development Corporation, economic development commission and other sources can help provide this information. The long-term growth of the population will have a significant effect on the franchise's potential success.

• Competition. Study the competition that will compete directly against the franchise. Then study indirect competition. For example, a specialty coffee shop might compete against delis, gourmet shops, etc.

• Price. The price for the product or service should be consistent with average incomes for people in your geographic area. A high-price product will sell in an area where income is high but would probably be a loser in an area with low-income households.

• Advertising. Find out how much advertising the franchisor does on a local, regional and national basis. This is very important when you consider the value of a franchise. A franchisor with a less expensive franchise fee may lower operating costs by limiting its advertising. This may hurt your franchise sales and business growth.

• Advertising campaign effectiveness. The franchisor's marketing expertise is very important to your success. You should expect the franchisor's help in generating sales. A franchisor should offer effective advertising tools that include the creation of newspaper, radio and television advertisements. These should be professionally prepared along with a marketing strategy that will maximize their use.

• Cooperative advertising. Most franchisors require the franchisee to pay cooperative marketing fees. This is typically a percentage of revenues. It is important to understand how this money will be used and what impact it should have on your franchise.

Step 2 - Examine the Franchise and the Franchisor

Step 3 - Analyze and Evaluate the Disclosure Statement

Step 4 - Investigate the Franchisor

Step 5 - Make a Decision