Should You be a 'Guinea Pig' for a New Franchise?

Cliff Ennico
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Posted: Feb 12, 2013 12:01 AM

"I was downsized from a corporate job about a year ago. I have never run my own business before, but I am realizing now there is no future for me in corporate America (I am over 50 years of age), so I am looking at entrepreneurial options.

"My outplacement firm recommended that I consider buying a franchise. The problem with franchises, though, is that the really good ones are too expensive.

"I was approached recently by a franchise that's just getting off the ground. It's a restaurant concept founded by an award-winning chef.

"The problem is that the franchise has no franchisees yet. I would be the first.

"How do you evaluate the risks in a franchise when you can't talk to other franchisees?"

It used to be that franchise developers would open and run at least 20 or 30 outlets before selling their concept to franchisees. Not anymore. These days anyone with a franchise concept and the money necessary to register with the Federal Trade Commission (FTC) is launching a franchise. As with any new venture, the buyer must beware.

Here are some things to think about before you commit your time and money.

--Is the franchise properly registered? About a dozen states require franchises to register with a state government agency (usually the Attorney General's office) before they legally can offer franchises to in-state residents. If you are living in one of these states, you should ask the franchise if they are registered and get hold of their registration documents (often these are more detailed than the Franchise Disclosure Document on file with the FTC).

If you are in a registration state and the franchise is not yet registered there, do not do ANYTHING until they are.

--Do the people running the business know what they are doing? Just because someone is a brilliant chef does not mean he knows how to run a successful restaurant. Spend lots of time speaking to the franchise's management team, and ask some tough questions, such as:

--Do they have in-depth knowledge of the restaurant business?

--Do they understand how franchises work?

--Have they worked with similar types of restaurants before? (If this is an upscale restaurant concept and the management team has only worked with fast-food franchises, head for the hills.)

Pay especially close attention to the franchise's real estate team -- the people who will help you select the location for your first restaurant. Successful restaurants are all about location, location, location, and many restaurants with poor locations fail even though the food is terrific.

--Is this a trendy restaurant concept? Beware of restaurant fads. Five years ago, everyone was opening soup kitchens. Two years ago it was cupcakes. If the restaurant's claim to fame is based only on a limited number of menu items, they probably will have trouble adapting once the fad passes.

--Will the concept fly in your part of the country? Certain restaurant concepts work only in certain parts of the country. People in northern states do not consume fruit smoothies the way they do in the Sunbelt -- especially during the winter months.

If the franchise's menu items are inexpensive, it will probably not do well in high-rent parts of the country (such as the Northeast) where you will have to sell thousands of items just to cover your monthly expenses.

And forget about selling high-concept, spicy ethnic cuisine in "meat and potatoes" parts of the country (you know who you are).

--Will the franchise bend its rules? Since the franchise's management team knows as little about the business as you do, they should not enforce franchise restrictions too narrowly. You should be given the opportunity to bend if not break the rules if you think it's necessary for the franchise to succeed in your territory.

--Can you sign up for a HUGE territory? You correctly point out that you will need to be a gambler to buy this franchise. If you're going to gamble, go for the highest stakes possible.

Do not accept a small, limited territory defined by a handful of ZIP codes. Buy the master franchise or area development rights for your entire state or region. By doing so, you accomplish two important goals:

1. You minimize the risk of failure, as chances are there are at least one or two places in your state where the franchise concept will actually work

2. You can become immensely wealthy if the franchise concept takes off and becomes hugely popular.

Just remember that you will be selling franchises to others in your state, and will share responsibility with the franchise if the concept flops.

--Know yourself. To succeed with this franchise, you must be fiercely independent, highly entrepreneurial, persistent and aggressive. If you need lots of support and hand holding from a franchise, or fear taking risks of any kind, look for an established franchise with a proven concept.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2013 CLIFFORD R. ENNICO.

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