In light of the current economy, many people are thinking twice about starting independent business ventures; instead, they're looking to franchising. Why?

Franchising offers safeguards independent businesses cannot provide. That's not to say you're guaranteed profits, even in a mature, successful franchise system. However, franchisees can capitalize on the reputation of a successful name and business system, lowering their risk in an economic climate where the consequences of failure can be high.

As with any business venture, your risk will be lowest if you plan ahead and thoroughly research every aspect of the franchise system you want to join. Approach the matter rationally and systematically, considering each of the following risk factors.

Franchise Risk Factor #1: Compatibility

Some people do not belong together; similarly; not all entrepreneurs and franchisors have chemistry. Even if a franchised business seems very appealing, you must consider your compatibility with its system, product/service and guiding philosophy.

How to reduce your risk

1. Find a franchise that inspires you

Are you fascinated by the product or service a franchise sells? If the work is not enjoyable, intriguing or even inspirational, you may struggle to succeed, even in a sound franchise system.

Of course, some franchisees are inspired simply by running a business—for these men and women, the product or service itself is secondary. If this sounds like you, make sure the franchisor's business model allows you to run your location the way you would like. Not all franchisees desire a highly structured relationship and some are surprised by the number of rules they have to follow.

2. Find a franchisor willing to train

The more experience you have operating businesses similar to your prospective franchise, the better. However, this does not mean you require experience with the specific product or service being sold. Ask the franchisor's representatives about the type(s) of training provided. Having received the franchisor's response, visit several current franchisees and gauge their opinions. Initial training is only one aspect of franchisor support. Expect your franchisor to provide ongoing support as needed, including refresher courses and training for upgraded products or services, along with periodic inspections. Also ask the franchisor if it hosts seminars or other get-togethers for franchisees. The franchisor's answers will not only suggest their level of involvement with individual businesses, but also give you a sense of minimum standards, e.g. design, inventory, equipment, etc., and performance levels you're required to meet.

Finally, make sure you have someone to turn to in cases of emergency. Some franchisors will assign you a mentor or coach, while others provide a help line you can call at any time. Be wary if your prospective franchisor lacks these franchisee support services.2

Franchise Risk Factor #2: Capital

Finding the money for initial franchise fees and capital investments may be your biggest obstacle. However, you shouldn't see this as a negative. Your financial restraints will eliminate those franchisors whose equity requirements are beyond your safe reach. Buying an affordable business allows you to avoid heavy debt from the outset.

How to reduce your risk

1. Determine your net worth

A franchise that seems reasonably priced may still be too expensive for you. Contact your business advisors to help you prepare appropriate and reasonable financial forecasts of the proposed business. This is the best way to ensure you cover all expenses.

2. Review your franchise agreement and disclosure document

Having established your net worth, you will need to turn to the disclosure document and franchise agreement to learn more about costs, fees, budgets, financing assistance, margins and royalties. Many franchisors will be open to negotiating soft costs, such as initial franchise fees, and may even allow you to spread out payment for various fees.

Franchise Risk Factor #3: Size and strength of the franchise system

The number of locations a franchisor currently has is one indicator of its stability. A large franchise system typically has a proven product or service and can provide you with valuable experience. However, popular franchises are also in high demand, and rarely negotiate terms—a smaller, newer franchisor could make a great ground-floor opportunity.

How to reduce your risk

1. Know the franchisor's history

A franchisor's number of locations is only half its story. Franchisors will sometimes buy out or close unsuccessful franchises to remove problems. To learn more, try asking the franchisor directly, or speak with existing franchisees and search the Internet for more information.

2. Read your disclosure document thoroughly

The franchisor's disclosure document and marketing materials can provide detailed information on the strength of the franchise system. Clarify the following:

• The franchisor's overall financial position;
• Projected sales/profits for the franchised location you plan to buy;
• Special insurance requirements (if any), and who is responsible for paying them; and
• Litigation records, i.e. the franchisor's litigation history, both administrative and civil, including bankruptcy proceedings. Bear in mind that any company operating in the public sphere will face litigation from time to time. Focus instead on the kind of lawsuit, e.g. fraud.

Franchise Risk Factor #4: Local market conditions

Before you sign a franchise agreement, consider if the franchise brand is a good fit for your territory and target market. Even a nationwide chain may struggle in certain communities. Marketers and business consultants can develop marketing plans and demographic studies to support your contention that the franchise is perfect for your market. However, you musn't believe everything you hear. Talk to real estate agents and other business people (and prospective customers) to make sure the business will garner some interest in your proposed territory.

How to reduce your risk

1. Objectively evaluate the product or service

Look past your enthusiasm and be objective about the quality of the franchisor's product or service. Ask the opinions of businesspeople, friends and family—especially if they're part of your target market.

2. Evaluate the franchisor's prices

The prices charged for the franchised product or service must be reasonable for your customer base and neighbourhood, overall. You may have little flexibility on price points, so consider this carefully.

3. Judge the competition

You need to know if your territory already has businesses serving your potential clients, even if they are not direct competitors. For example, a quick-service pizza restaurant will compete not only with other quick-service pizza restaurants, but hamburger restaurants, sub shops and doughnut shops. If it delivers, it will also compete with full-service pizza restaurants and even grocery stores selling frozen products. Is there room for a new business in such a crowded market?