Franchising is booming.. The road to fame isn't always paved with riches, however. While most franchises are legitimate and many offer great potential for success, there are pitfalls to avoid and strategies to follow that can help you along the way.

Investing in a franchise operation takes a lot more than money. It takes time. Time to do research and time to reflect on whether or not the franchise you are considering is the right one for you.

Whenever you're investing your money you want to make sure you're investing it wisely. Following are some guidelines on what to look for (and look out for) in your quest for the "perfect franchise."
  1. A franchise that complements your interests.
    It's no secret that we all have different talents and interests. When looking for a franchise make sure that you match your interest and skills with the business you select. If you loathe cooking and have no interest in it, don't look for a food service franchise.

    You are going to be spending a lot of time with your franchise operation. Many franchisors require that franchisees be actively involved in the franchise. (Some do, however, consider taking on owners who will not necessarily be operators.) You should be clear that the franchise business not only appears to be a money-making but one in which you will enjoy making your money. You will be investing tons on time in your operation. It has to be enjoyable to you, otherwise there is no point in having your own business.

    As you begin your search, consider your interests. What do you most like to do? Then direct your search toward those areas that most closely match your interests and skills.
  2. A fee structure you can live with.
    Make sure you fully understand what fees are involved -- all of the fees. What products or services will you be expected to buy from the franchisor? Can you purchase products from other sources? Will they provide you with a list of names of these sources?

    A legitimate franchisor is just as eager for you to succeed as you are. S/he'll carefully go over with you the costs involved in starting your business. Those costs will include not only the franchise fee itself, but a business site, inventory, insurance, equipment, wages for employees and working capital.

    Could you save money by leasing equipment required for the franchise, rather than purchasing it? Could you, for example, save money by converting an existing fast-food location into the new fast-food franchise or must you start from scratch?
  3. Name recognition.
    The reason franchises are so popular is that franchisees are able to capitalize on the success of an established business -- and its name.

    You'll want to associate yourself with a franchise that has established name recognition. You are buying a "proven system" of doing business. Is the name one your customers will immediately recognize? Is it one they trust? Has the company been a target of law suits? What have these suits done to the company name?
  4. A strong training program.
    A well-developed training program, including sound operations manuals, procedural handbooks, on-site training and on-going training opportunities is essential to your success as a franchisee.

    You'll want to receive information on sales, inventory control, merchandising and operations. In addition many franchises offer training on general business skills such as hiring and training employees, etc.

    Does the franchisor have a program for follow-up support, seminars? Does the franchisor provide telephone support and additional on-site training sessions for you and for your employees? How much do they cost? Is there a company newsletter to keep you informed about the goings-on of your fellow franchisees? Do you get together occasionally for an annual meeting?
  5. A franchise that can boast of other successful franchisees.
    Check references. Ask those references for other references -- don't check just the names you're given. Satisfied franchisees are your green light to a successful choice.

    The best thing you can do is to visit the site of some of these "successful" franchisees. Call in advance and make an appointment. Sit down with a current franchisee and ask them a batch of questions. Most will be agreeable--they were once in your shoes.

Remember, you are investing a bundle in this new franchise operation. It's up to you to do as much homework and research as you can to avoid disaster. Here are five important things to consider to help you avoid any pitfalls.

  1. Unbridled growth.
    Beware of the franchise that brags about how many new franchises it's sold within the past year. When franchisors become overextended they aren't able to offer their franchises the level of support necessary to sustain solid operations. Quality and profitability may suffer.

    When franchises become under capitalized, there's a tendency to sell franchises to anyone who has the necessary funds. Don't jump into something simply because the "price is right."

    Check on the track records of franchisees that have signed up in the last year or so. How are they doing? What about more established franchisees? Can you determine how long it will be before you make back your investment?
  2. Hidden costs.
    Understand completely what fees are involved and what products and services you're expected to purchase from the franchisor. Will you be required to purchase all materials and inventory from the franchisor? Are those costs competitive with what you could obtain "on the open market"?

    Carefully examine the royalty structure of the franchise as well. If there's an ongoing franchise royalty involved, what is the percentage? How will this extra expense affect your bottom line?

    Royalty figures in terms of percentage points often sound low such as 5% or 6.5%. They do add up. Take out your calculator and perform some basic math and see where you stand.

    It's also important that you consider how often these payments must be made to your franchisor. Are they made monthly, quarterly or annually?
  3. An opportunity that sounds "too good to be true."
    Be cautious about claims promising "easy money," or "guaranteed profits." There are no guarantees in business, regardless of how impressive the figures look on paper.

    If it sounds too good to be true, it probably is.

    When considering a franchise opportunity, do some homework of your own. What competition will you be up against in your sales territory? Does the franchise establish specific territories so you won't be competing with other franchises under the same name? Is there a demand for the product or service in the area you'll be located?

    Just because a franchise has been successful in one market, doesn't mean that success will automatically transfer anywhere. Make sure you understand your market.

    Remember that the Federal Trade Commission in Washington, D.C. has ruled that it is illegal for a franchisor to make any claims on sales or revenues that you might generate with your new franchise operation. In other words, they can only tell you what other franchisees have made in their locations. They can not predict your results in your market. If they do, they are breaking the law.
  4. Franchisors that promise a profit in your first year of operations.
    It may take some time to get your business off the ground. Promises of "quick cash" or "easy profits" are empty promises. A franchisor who tells you, up front, that you may not make a profit during your first -- or even second -- year of operations is providing you with some honest feedback on what to expect.

    The best bet is to talk to other franchisees in areas that might be comparable to yours. Did they make a profit?
  5. Your own motivations.
    If you're looking for a franchise because you want to "make money," you may be in it for all of the wrong reasons. Success in franchising, as in any business, requires a strong commitment. You must love the business and have an emotional investment in it as well as a financial one.----------------------------------------------------------------
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