Franchising  

So You Want to Buy Into a Franchise?

What should a prospective franchisee know before getting into the franchise business? There's a lot more to it than you might think, but Dr. Hayes has some answers
 Is it too good to be true? (Yes, probably.)
 
 

So you want to become a franchisee. But do you know the right questions to ask, or even where to start? You probably don’t, but that’s okay – even we have a lot to learn. That’s why we have professionals like John P. Hayes, Ph.D., a professor with over thirty years of experience in helping new franchisees realize their business goals. We caught up with Dr. Hayes on the phone from Kuwait, freshly back from the International Franchise Expo (IFE) in New York where he teaches his long-running symposium on the A-Zs of Buying a Franchise, and picked his brain for some pointers on what to know before getting involved in the franchise business.

 

There are More Exceptions Than Rules in This Business

We started the interview intending to focus on the difference between national and regional franchises, the support one might be able to offer that another one couldn’t – but we quickly learned that generalities aren’t a luxury that can be applied to franchises.

“One of the important things to remember in franchising is that it’s very difficult to compare apples to apples, regardless of what you’re talking about,” says Hayes. “There could be some local franchise chains that could provide services that are far superior to even a major national chain, and we don’t know that unless we’re able to specifically talk about companies. People ask questions like ‘what’s the average?’ or ‘how many franchisees succeed or fail?’ You can’t answer those kinds of questions because, unless you’re talking about ABC or XYZ franchise, you’re not going to get an accurate answer. There are going to be exceptions more likely than not – that’s really important for people to understand.”

 

Research and Development is Key (If You Can Get It)

With that said, even though every franchise and situation is different, there is one aspect that Dr. Hayes recommends all potential franchisees look out for and that could put some national chains at an advantage over smaller chains: active research and development.

“When you pay a royalty as a franchisee, that money goes for the franchisor’s profit, the CEO’s salary, training and operations, and maybe for some even advertising,” notes Hayes. “But one of the areas that often gets overlooked is the group of people who are looking five years down the road at how that franchise is going to change – either because the market is going to change, or the government is going to pass some new legislation, or there are economic factors or food issues like fried versus grilled that could change the business. You need a group of people (and research and development is typically where it occurs) who are looking not at the business today or the business tomorrow, but the business five years from now and ten years from now – how things are going to be different and how to help prepare the franchise network for that. That’s something that a local chain may not be able to afford to do, just by the sheer lack of volume and royalty dollars coming in.”

 

Don’t Be Afraid to Ask Questions

Asking questions can be awkward and difficult – but being unsuccessful in a business you hate because you didn’t ask any questions is even more awkward and difficult. Hayes asserts that a franchisee can’t be afraid to ask hard questions, especially when it concerns the money you’re putting into it.

“People frequently don’t know that they can ask: ‘okay, if the upfront franchise fee is $35,000, please explain to me why it’s $35,000 and what do you do with it?” says Hayes. “Some people first of all would not know to ask that question, and number two would think that’s not an appropriate question to ask or it’s not one that a franchisor is going to answer.” And it doesn’t matter what the fee is, but you should expect at least three-fourths of the amount to be reinvested in you, because that’s what that money is for – to teach you how to be a successful franchisee. If they’re paying the franchise salesperson, and the franchisor is taking some of the money as a profit, and if the lawyer gets paid, and if travel expenses get paid and expo fees get paid and there’s $5,000 left for training and support, that’s not satisfactory. It’s like investing in an MBA or any other education, and you should expect them to be using that money to help you get that education. That question is so important to ask, and most people wouldn’t know to ask it.”

It’s the same with royalties, he says. “If your royalty is 5 percent, then say to the franchisor, ‘please show me where these nickels that I’m giving you, and that all the other franchisees are giving you – where are you spending the money?’ You have a right to know that as a franchisee, and the answers to these questions will tell you a lot about the integrity of the franchisor.”

 

Emotions and Franchising Success Don’t Mix

Those may be important questions, but they aren’t the only questions. We asked Dr. Hayes if there’s anything a prospective franchisee should consider but might not think of. In short: everything. But a lot of that has to do with emotions getting in the way of perfectly good business sense.

“Most of what [prospective franchisees] need to consider they’re not considering – either because they don’t know that they should, or because they get caught up in the emotional side of franchising and they decide to buy something before they’ve really intellectually thought it through,” says Hayes. “They’re expecting in many cases that franchising is a turnkey – which is a word that often gets used by franchisors and which sounds like you put the key in, turn it, and now you’re a millionaire. It’s very misleading, but understanding what you can accomplish, what’s required of you as a franchisee, what’s required as a franchisor, and the kinds of complications that you’re going to run into – all of that gets lost in the excitement of how thrilled you are that you’re going to be in your own business and creating something and serving customers and doing something great in your local community and rah rah rah.”

How can emotion get so involved in starting a business? When one considers the power of branding, it’s not that surprising when it comes to buying into an existing franchise. “We don’t make any decisions without our emotion telling us to first and foremost,” Hayes points out. “We justify it intellectually later, but emotionally we make the decision. So when you say ‘should I buy this brand or that brand?’ There’s more emotion involved in that than intellectual decision-making. People have a very difficult time realizing that, understanding it, and then what do I do about it? How do I figure out, even though I’m most excited about this one because it reminds me of my childhood or it reminds me of my father’s business or it makes me feel more comfortable – is that a good reason to buy a business? The answer is no, it’s not! So you’ve got to intellectually think through – well, even though this one makes me feel more sentimental, this one makes more sense for me intellectually for lots of reasons, and while I won’t feel sentimental about it, I might actually make more money.”

 

Looking for What’s Hot is a Good Way to Get Burned

So if emotion isn’t the right guide for choosing a franchise to buy into, what is? Should a new franchisee hop on the latest franchise of the moment? Not really – in actuality, following trends is little more than following the emotions of consumers. 

“Unfortunately, one of the most common questions that I get from people is ‘what’s hot?’” says Hayes. “My answer is always: ‘well it really doesn’t matter, because buying what’s hot is the quickest way to get burned.’ So many people focus on ‘I want to buy what’s hot,’ and this is an emotional appealing factor – whatever’s trendy and hot and selling the most now, that’s what I want to get into whether it makes sense or not. People have to understand that there’s a whole methodology to investigating franchising, and unless you follow the methodology, chances are you’re going to get burned or at least lose money or be unhappy as a franchisee. A lot of people who get into franchising [that way] rue the day and wish they’d never heard of the word and had never invested their money.”

 

The Only Thing Harder than Finding Good Franchising Information is Finding Good Resources for Good Franchising Information

With so many emotional appeals pulling new franchisees in the wrong directions, where can someone go to find good guidance? “Where’s a good place to start?” we ask Hayes. “Because there’s so much out there, and…”

“And most of it is horrible!” he exclaims, to our full concurrence. “Most of what’s on the internet is not worth reading: a lot of it is misleading, put there by franchisors and salespeople who want to get you to buy something, and there’s very little on there that’s factual and is really going to be useful for someone on how to methodically research franchising and arrive at a decision that makes sense for buying one. Unfortunately, there’s not a lot.”

What’s a new franchisee to do? Luckily there are options. “If you can time your investigation of franchising to coincide with going to [the IFE, the West Coast IFE in the summer, or a similar franchising expo event], you can find people and symposia and seminars that will be very helpful,” says Hayes, explaining that at his symposium he straight up tells attendees that franchising isn’t for everyone and might not be right for them – a refreshing alternative to sales pitches that exclaim how everyone can profit from franchising.

“The International Franchise Association at franchise.org is another place,” he adds. “They have very good material and information that will help people understand how to investigate franchising.”

Another suggestion from Hayes: go back to school. “I teach franchising online for Southern New Hampshire University, and it’s a graduate program so these are graduate students, [but] there are probably some other universities teaching franchise related courses online, and if they’re available through continuing education programs, that would be worth it,” says Hayes, who just completed teaching a twelve-week online course for students from diverse locations ranging from Florida to Mexico to Brazil. “The difficulty there is that they say: ‘twelve weeks? I hope to be in business next month!’ which is also impractical. Twelve weeks is a long time, but really it takes about twelve weeks at least to do a thorough investigation in franchising, and if you have guidelines like a course then you could depend that on every week to get answers to your questions, to understand the methodology of what you need to explore and investigate, and to just know the right questions to ask.” 



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