Money expert Clark Howard says that the U.S. economy is experiencing a slow but sure pivot as the Federal Reserve tries to tamp down inflation.
“We have an extremely strong job market in the United States, but I have no doubt that we are going to have softness in the job market,” Clark says, “because what the Federal Reserve wants, eventually it gets, and that is a slower economy.”
“When people get laid off mid-career, that’s when a lot of people decide that they’re going to become entrepreneurial,” Clark says. “When we get laid off, we say, ‘What do I do now?’ and that gets us interested so often in franchises.”
What Is Franchising and How Does It Work?
Franchising involves buying into a brand’s trademark, name and operating system to distribute their products or services.
The way it typically works is that the franchisee, the person who buys into the business (franchisor), pays an initial setup cost as well as royalties off sales and sometimes a lease associated with a specific place of business.
“The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor,” says Franchise.org, a site run by the International Franchise Association.
What To Know Before You Buy a Franchise
Clark wants you to think long and hard if you’re thinking about buying a franchise. He wants you to make sure it’s not just a knee-jerk reaction in response to economic difficulties.
“Anytime the economy slows, I get really worried about people being taken advantage of from franchise roadshows and presentations,” Clark says. “The brochures are gloriously beautiful and ‘the path to wealth’ and all the pitches.”
Here are some tips from Clark to protect yourself if you’re thinking about getting into a franchise.
1. Understand That Franchising Is Not a Passive Business
“First rule of franchises: Never buy one as a passive investor,” Clark says.
The money expert says that he’s seen many instances in which a professional athlete or celebrity is pitched a franchise and they’re present for the ribbon-cutting but are hardly involved in the business from there.
“Do those things work out? No, they don’t,” he says. You have to have “hands-on, active, management, involvement with a franchise. You can’t be someone on the periphery or an absentee owner.”
2. Go Undercover To Learn About the Business
“You go and you work for a location of that business doing anything, emptying the trash cans, I don’t care what it is, cleaning the toilets, whatever it is,” Clark says. “I want you in that business seeing the nuts and bolts, not the fancy brochure, not the sales presentation, not the high pressure for you to sign the franchise agreement. You need to know what it’s really like day to day.”
When you go undercover, you’ll quickly be able to see how involved and committed the franchise company is to helping you run the business.
“Do you really get support from the franchise company?” Clark asks. “Or is it just their name on the building you’re paying fees for, and they’re not there to support you?”
Another thing this method will do is allow you to see the financial condition of the company.
How Long Should You Work Undercover With the Franchise?
“Six months is what I want from you,” Clark says.” You want to see what it’s really like. And they cannot know that you’re a prospect to buy one.”
3. Make Your Decision
Based on your experience working undercover, Clark wants you to make your decision.
“You do that time, and then you’re ready,” he says. “Because if it all lines up and you love the business, and you love the franchise, then you can proceed.”
Before you do so, make sure you distinguish between the concerns you have with the company and those you have with the industry.
- Concerns With the Industry: “The truth is that most of the time, you’ll say, ‘What was I thinking? I’m never getting involved in this industry. I thought I’d enjoy being in this industry. I’m not going to enjoy it,’” Clark says.
- Concerns With the Company: “It could be, ‘This franchise company is a disaster.’ And you dodge a bullet that way,” he says. But you won’t know that until you’ve done a six-month stint as a regular worker with the company.
4. Solicit Feedback From Other Franchise Owners
Once you’ve decided that you want to invest in a particular industry, it’s up to you to choose a viable franchise.
“If you love the business and you hate that franchise, then you look for another franchise opportunity,” he says. “But before you go forward, go talk to owners of franchises. Find out their beefs. Any franchise owner is happy to tell you what they hate about the franchise company they have to pay royalty fees to every month.”
In these economic times, preparing for a layoff has become all too commonplace. If you still have many working years ahead of you, Clark says the key is to never lose confidence in yourself.
“Sometimes, people have such a bitter aftertaste from being laid off in a company or industry that they run away from that industry, and they start somewhere else completely fresh in something that they have no experience, training or education in,” Clark says. “But your greatest opportunities when you do get laid off always are in using the knowledge base you’ve developed over time in that field just working for someone else or yourself.”
Want more job tips from Clark? Read our Work From Home Guide.