The 4 Rs of Success

Realism • Research • Reserves • Resolve

Realism

At the outset of your investigation, it is important that you be realistic about your strengths and weaknesses, your goals and your capabilities. I strongly recommend that you take the time necessary to do a personal inventory—possibly with the help of outside professionals—before investing your life's savings in a franchise.

Franchising is not a money machine. It involves hard work, dedication, set-backs, and long hours. Be realistic about the nature of the business you are buying. What traits will ultimately determine your success? Do you have them? If it is a service-oriented business, will you be able to keep smiling when you know the client is a fool? If it is a fast-food business, will you be able to properly manage a minimum-wage staff? How well will you handle the uncertainties that will invariably arise? Can you make day-to-day decisions based on imperfect information? Can you count on your spouse's support after you have gone through all of your working capital reserves, and the future looks cloudy and uncertain?

Research

We have already walked you through various resources available to you. Now use them! Research is a tedious, boring process. But remember, you will probably be in the business for at least five years, if not more. It is a hefty, long-term investment.

Be rigorous in your research! A thorough analysis of the literature you receive should allow you to reduce the list of prime candidates down to 6-8 companies. Aggressively evaluate each firm. Talking with current and former franchisees is the single best source of information you can get. Where possible, site visits are invaluable. My experience is that franchisees tend to be candid in their level of satisfaction with the franchisor. However, since they don't know you, they may be less candid about their sales, expenses, and income. Go to the library and get studies that forecast industry growth, market saturation, industry problems, technical break-throughs, etc. Don't find out a year after becoming a franchisee of a coffee company that earlier reports suggested that the coffee market was over-saturated or that coffee was linked to some form of colon cancer.

Reserves

As a new business, franchising is full of uncertainty, uneven cash flows, and unforeseen problems. The financial health of you franchise may not resemble any of the forecasting you performed in developing your business plan. Your cash reserves may be seriously drained as numerous financial obligations must be met regardless of sales: rent, employee salaries, insurance, etc. Adequate back-up reserves may be in the form of savings, commitments from relatives, bank loans, etc. Just make certain that the funds are available when, and if, you need them. To be absolutely safe, I suggest you double the level of reserves recommended by the franchisor. Allow yourself adequate breathing space and do not do anything you are uncomfortable with, such as pledging your house for a bank loan.

Resolve

Let's assume for the time being that you have demonstrated exceptional levels of realism, research, and reserves. You have picked an optimal franchise that takes full advantage of your strengths. You are in business and bringing in enough money to achieve a positive cash flow. The future looks bright. Now, as two obstacles arise, resolve comes into play.

The first is the physical pain associated with writing that monthly royalty check. Annual sales of $250,000 and a 6% royalty fee result in a monthly royalty check of $1,250 that must be sent to the franchisor. Every month. As a franchisee, you may look for any justification to reduce this sizable monthly outflow, such as reporting lower sales. Resist the temptation. Accept the fact that royalty fees are simply another cost of doing business. They are also a legal obligation that you willingly agreed to pay when you signed the franchise agreement. They are the dues you agreed to pay when you joined the club. Honor your commitment.

The second obstacle is the desire to change the system. What makes franchising successful as far as your customers are concerned is uniformity and consistency of appearance, product/service quality, and corporate image. The most damaging thing an individual franchisee can do is to suddenly and unilaterally introduce changes to the proven system. While these modifications may work in one market, they only serve to diminish the value of the system as a whole. Accordingly, any ideas you have on improving the system should be submitted directly to the franchisor for its evaluation. Accept the franchisor's decision on whether or not to pursue an idea. If you cannot do this, you may be a closet entrepreneur who should not enter the world of franchising.

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