Work out franchise value before doing a deal
Franchises now account for 40 per cent of the retail businesses in Canada  Corporate downsizing and cost trimming have triggered some fat termination payouts. But former employees with big packages don't always want to return to the rat race. They want to go into business for themselves.
More than 6,000 new franchises open throught out the country every year  A lot of them end up buying franchises. They may be attracted by the potential to make their own decisions, a love of the product, or the apparent opportunity to build equity and enhance their nest eggs.
It's not unusual to spend at least six months investigating the franchises' finances and how the system operates. Don't rush a decision!  But franchising has also been a graveyard for many of these dreams. Consider the suitability of the franchise, the franchisor's reputation, and how it all fits with your overall objectives.
   Prepare a plan. it is important to have a written personal plan that articulates your financial goals and objectives. It should show where your resources are now and help you plan for how much money you will need in the future
   A plan helps clarify what you are prepared to risk in a business venture and your expected return. Let's say it shows RRSPs of $50,000, a severance package of $60,000, a home, a car and a related mortgage and auto loan. You require $3,50O after tax each month to pay your bills. In this case, it would be very difficult to risk much money in a new venture.
   Determine your suitability. When moving from corporation to franchise, you will find the changes enormous. Working for yourself is often exhilarating, but it can also be very difficult.
   You may have been an outstanding manager in a corporation where there is a regular pay cheque, benefits, liberal travel and entertainment expenses, and social interaction with peers, bosses and subordinates.
   But as a franchises, you won't have a guaranteed pay cheque. In the startup year, you may not have any funds to take a salary, and you will be responsible for your own benefits. Although some franchisors provide access to group plans, you still have to pay for them
   The social side of business will be limited to suppliers, staff and occasional visits from an area manager. Trips and expense account travel will probably be restricted to attending the franchisor's annual convention and some regional training.
    The most important adjustment is that you are responsible for what happens to your business. While most franchisors provide varying degrees of support, ultimately it is your money on the line and you will be locked into your business.
    Family life will change dramatically. In some cases, family members work for the business. You generally have much longer hours than in the corporate world. And there will likely be nobody to rely on if you get sick or you cannot go to work for whatever reason.
   Know the franchisor's reputation. The franchisor should have a track record for providing complete assistance. This includes site location, advertising and marketing support, operations support, continuing training for the franchise principals plus employees, and special financing programs.
   In addition, the franchisor should continue to stay abreast of changing customer needs and enhance the franchise value with new products or services. Tim Horton's started life as a coffee-and-doughnut franchise, but it has evolved to include bagels, cakes, and soup and sandwiches.
    Whether such extensions are profitable depends on many factors. But the key is that the franchisor continues' to develop to meet customers' needs.
   How the chain deals with franchisees who do not adhere to policies and procedures is another important factor. A good franchisor will quickly eliminate marginal franchisees and those who abuse the system. Your ability to build your franchise and to raise the value of your location depends to a large extent on the value of the overall trademark.
    If a franchisor does not effectively police franchisees who are pulling down the trademark's value, it will cost you money. And it is much harder to sell a franchise if that value has been tarnished.
   Make sure you work in a number of locations or speak to their owners before making a decision. Use a good accountant to help you analyze your deal, and a good lawyer to ensure your rights are protected.
    Check the goods or services being offered. Almost every industry has franchises or licences available. Make sure you feel comfortable with the one you choose. If your corporate career has been in finance, what do you know about print shops or dry cleaners?
   The most successful franchisees are those that can transfer their skills and knowledge to the franchise. Do your homework. What are the up-and-coming trends? How does demographics affect your choice?
   Finally, find out how many people in the chain's corporate office are waiting for their opportunity to buy a location. This is an easy but important test of the value of the franchise. If no one at head office wants one, why should you?
   Published March 30, 1998
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