The do's and don'ts of franchising

With franchising, just like any other business, success is far from guaranteed. But here are a few tips to better your odds.

By Jessica Dickler, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Franchising is anything but a sure thing. Just like starting any new business from the ground up, success is far from guaranteed.

In fact, studies indicate that franchises have only a slight edge over their independent counterparts.

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And with new franchisors hitting the scene at a rapid rate, it can be hard for entrepreneurs to determine which franchise offers the best chance of success, according to Laura Larson, the vice president of KeyBank's Small Business Administration (SBA) lending program.

"A lot more franchisors are coming into the market that aren't necessarily proven," Larson said.

To find a franchise that's credible, experience is key. Larson suggests looking for a business with at least 20 franchises already in operation in a variety of locations. Another important indicator is the franchisor's reputation for providing long-term support to its franchisees.

"The ability to provide value to businesses as they grow has a lot to do with the long-term success and happiness of the franchisee," Larson said.

In addition, small business development centers and the U.S. Chamber of Commerce can be valuable tools for deciphering a franchisor's business model.

And when in doubt, franchise brokers can help entrepreneurs find a franchise that's a good fit. But, be careful to find a broker who is freelance, Larson warns. Some brokers are actually paid by the franchisor to steer business in their direction.

But once you've set your sights on a particular business, only due diligence will better your odds for success from the start. So follow these steps from Larson to sidestep some all-too-common mistakes:

  • Do find a financial advisor immediately, preferably one who has worked with franchisees before. This may sound obvious, but potential franchisees often fail to get the right kind of help. An advisor will be able to help you evaluate your financial readiness and your franchising choices.
  • Don't expect to make money in your first year. Plan to have at least one year's living expenses to fall back on or provided for by a second household income.
  • Do read the fine print. By law, all franchisors must provide you with the Uniform Franchise Offering Circular (UFOC), a routine disclosure document. It should help you assess the company's commitment to your long-term success. For example, a front-loaded fee structure might mean that the franchisor is more interested in its own short-term gains than helping you get off the ground.
  • Do know who's in control. The span of control can vary from company to company. For example, some franchisors may allow you to purchase supplies from a variety of vendors, while others will only let you work with their approved partner. Make sure you understand - and agree with - who is responsible for what and how much decision-making leeway you have.
  • Do pound the pavement. Visit local franchises - they're listed in the UFOC - and interview the owners. Talk to a franchisee in the start-up phase to assess how much support he or she is receiving from the franchisor.
  • Don't settle for anything less than exclusivity. If the franchisor isn't giving you some territory to yourself, you're not getting a fair deal. The company should guarantee that it will only open a set number of franchises in your area. Ask how it arrived at this number and, if possible, work with your financial advisor to find a market research firm that can do an independent analysis.
  • Do remember that it's all about people. Many of your employees will probably be new to the workforce. Their youth, inexperience or limited abilities can present you with significant management challenges - as well as a great opportunity to teach them important job and life skills.
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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.