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“The franchise opportunity seemed like a low-risk way to start a business. I can follow directions, I can work hard, and I can qualify for financing. Why not buy into a proven system for success?”

Let’s face it. If a franchise opportunity were the tried-and-true formula for being successful and financially independent, everyone would be doing it. In reality, buying a franchise and working that business to stability (and then success) has its pitfalls. Having been through the process of purchasing, owning and operating a franchise business, I can tell you — the experience has been eye-opening.

Before you take the leap by signing that Franchise Agreement, take a deep breath and make sure you aren’t making assumptions about the franchise opportunity that lies ahead. In particular, don’t assume that…

The system is proven

Prospective franchisors tend to use the phrase “proven system” liberally. If this phrase means anything at all, it means only that one of the franchisees in the system at one time, in one locale, has achieved moderate success. It does not mean that the franchise business model has proven itself in your community, with your prospective customers, and with you as the owner. Be realistic about the value of the “system,” because business success in today’s world just can’t be whittled down to a formula.

In reality, small business success often has more to do with the entrepreneur behind the scenes, the individual who’s making the sound decisions to keep the business afloat. If you can run a franchise opportunity successfully, it’s likely that you can run any business successfully. In other words, the system does not create or ensure your success.

So how do you evaluate the cost of a franchise opportunity? What benefits will you be paying for?

An effective franchise model should streamline your start-up and ongoing operations: you don’t have to create a brand, you don’t have to decide how to lay out the inside of your retail space, you don’t have to select a product set, etc. There are many franchise opportunities out there, and each fulfills the efficiency promise to a different degree. You’ll have to evaluate each opportunity relative to if you tried to start up a similar business independently.

Two other important factors to consider when justifying the cost of a franchise opportunity are:

*Buying power. The franchisor should be able to consolidate the buying power of all the franchisees to keep your operating costs low — lower than they would be if you went out and secured vendor relationships on your own. Ideally, the cost savings should offset your ongoing licensing fees. To assess the value of a franchise opportunity’s buying power, go out and price your own inputs as an independent buyer. Say you are considering a Subway franchise; you need to compare the cost structure of an independent sub shop to that of the Subway franchise.

*Brand recognition. The most valuable franchise opportunities come with a recognizable brand name. Opening your business under a brand that’s already established potentially gives you immediate access to a base of brand-loyal customers. As soon as the Subway sign goes up outside your building, you may have people dropping in — because they already know what the Subway experience entails. By comparison, they won’t know what to expect from Joe’s Independent Sub Shop, so they’ll be more resistant to trying it out.

It’s tough to put a price on brand recognition. What you can do is assess how well the brand is known locally in your community. Had you heard of it before you began pursuing the franchise opportunity? Do your friends and neighbors know the brand? What are their perceptions of the brand? Is the franchisor taking steps to maintain and build the brand’s power through local, regional or national advertising?

If the brand is not well known, the up front and ongoing costs associated with the franchise opportunity should reflect that. Don’t get fooled into thinking that a “proven business model” is more compelling than a recognized brand name. It’s not.

This article series will continue with the next assumption you should never make about a franchise opportunity: that the Franchise Disclosure Document isn’t misleading. Come back for that discussion shortly!