How To Evaluate a Franchise Opportunity in Simple Steps
If you’re looking to buy your own business, a franchise might be the perfect option for you. Franchises are often well-established companies with solid management teams, and they can provide a great deal of training and support for new owners.
However, you must take your time and evaluate all of the options before you commit. A franchise is an excellent investment for many people, but you need to be smart and do your homework before making any decisions. In this article, we will cover some of the most important aspects of evaluating a franchise opportunity so you can make a decision about which one is right for you.
Do Your Research
Research the franchisor’s history and reputation, qualifications, and experience. If the franchisor is new, you need to find out why they’re entering this market.
You should evaluate the franchise’s financials to find out if it’s a sound investment. You need to know how much money the company is making and their expenses so you can see if they’re profitable or not before investing in them yourself.
You can check with the local Better Business Bureau to learn if there have been any complaints about the franchisor’s products, services, or personnel?
Have there ever been lawsuits filed against them for fraud, misrepresentation, or such? If so, how did these cases turn out; did people win? Is your investment protected by law from anything happening with the company, such as bankruptcy protection?
Understand The Costs
What are the franchise fees? This is a crucial question to ask before you sign anything. You need an idea of your total investment and how much money it’ll take for day one operations, and any additional expenses that might pop up down the line, such as maintenance fees, royalties paid, advertising fees, and other costs.
Some businesses might have higher start-up fees but lower monthly obligations, while another company could charge less upfront cash flow with more significant ongoing commitments.
What Level of Support and Training is Offered?
There are so many ways to succeed in franchising, but what is critically important for most franchisees? The training and help provided by the franchisor!
A good deal of a company’s success depends on its ability to deliver fantastic support from day one. The best franchisors will provide you with the training resources you need to succeed.
Many franchise owners have no previous experience in the product or service they will be selling, and some have no prior business knowledge, so comprehensive training is required.
Besides training at the company headquarters, the best franchise opportunities will offer online training resources, mentors, and continued on-going training. Essentially it’s a win-win situation as the franchisor will want you to be as successful as possible; with the proper training and support, you’ll be confident in running your local franchise.
Don’t be afraid of asking questions and getting all your concerns addressed before deciding on whether or not it’s right for you! This is a life-changing decision. If the business owner isn’t transparent, then move on; this is a red flag; there are plenty of other franchising opportunities to explore.
The Franchise Disclosure Document
Much of the information we mentioned above is available to examine in the Franchise Disclosure Document. The Franchise Disclosure Document, or FDD for short, is a legal disclosure that lists the franchise business’s essential information. It is given to prospective investors considering buying a franchise as part of the due diligence process.
The FDD is an important document that should be read and understood before signing any contract. The franchisor will provide you with a copy of this document, which is required by the Federal Trade Commission (FTC).
It contains information about matters such as the company background history, financial statements (including past performance and projections), number of franchises in operation, the total investment needed before opening, store location(s), ongoing costs after that point - royalties fees, advertising fund contributions, etc.
You should read through all these details carefully so there won’t be anything unexpected when signing the franchise agreement. Obtaining legal advice from a franchise lawyer is recommended before completing the agreement and handing over the franchise fee.
Contact Existing Franchisees
Get in touch with other franchisees and find out if they are happy with their franchising experience. The franchisor should be okay with giving you a list of people to contact. The best way to go about it is to speak to or visit several franchisees, old and new. Prepare a list of questions to ask them, such as if they were satisfied with the training given, what problems they are experiencing, if any, how long before they achieved ROI, and how they rate their relationship with the franchisor.
The other way to find existing franchisees and ones who have recently left the business is in the FDD under item 20. Tucked away at the back of the document is a rich source of information. It includes several useful charts, a list of all the franchise companies’ outlets, and contact information of current and former franchisees (name, address, telephone number).
Determine if You are a Good Fit for the Business
There are many great franchise opportunities available on the market, but you need to make sure it is the right kind of business for you. You need to make sure that the franchise is a good match for your skills and interests. A big mistake is investing in a company that you’re not passionate about. Once you’ve committed, it will be hard to reverse your decision.
In addition to deciding if you are a good fit for the franchise business, you need to determine if the franchise is a good fit for you. You should consider your lifestyle and how a new franchise business will impact it.
These are the types of questions you should ask yourself and be honest about:
What kind of money do you need to make per year to live comfortably?
How much time do you have to invest in this business, and what kind of lifestyle can it afford?
How will a franchise business affect your personal life or family obligations such as childcare?
How does franchising fit into other aspects of your current financial plan - retirement, savings plans, insurance policies, investments, and college funds contributions?
Is it a short-term or long-term investment? Are you looking for something that will last decades and be passed on to your children? Is the franchise scalable?
Purchasing a franchise is like any other investment: there’s no guarantee of success. But if you find a product or service you like and carry out a thorough evaluation of the franchise business and it ticks all the right boxes, chances are you’ve made a great decision.
Starting a small business without putting in the time-consuming effort of start-up operations makes it a lot less stressful. Combined with good training and support and the fact that you are aligned with an existing brand name with a proven track record makes the franchise model less risky than most.