Following my last post, "Franchise Ownership Part 1,” let's continue our journey discovering what it takes to buy and own a franchise. More specifically, here’s what to look for and a list of some questions you'll want to have answered:
1. Consider the Market
• Is there sufficient demand based on the franchisor’s models and data? Ask them to share that information.
• Has the franchise clearly defined its niche? Do they clearly understand who their customer is?
• Consider the competition—what makes you better or unique? Why will a buyer choose you?
• Is there longevity for the product or service?
2. Company History
• Know the track record of the franchisor (You've heard that past performance is no guarantee, right?).
• Brand reputation and brand recognition are important—try searching on Google Trends and Twitter using related keywords (Remember, we talked about being connected...).
• Look at and interview Senior Management re: their experience and tenure. Are they still active in the company and if so, what's their role?
3. Financial Statements (All disclosed in the FDD, or Franchise Disclosure Document. Pay attention to Article #21.)
• Are there any bankruptcies, insolvencies and or pending legal issues? (Item #4)
• Compare against similar companies in the industry, both franchise and non-franchise.
• Any unusual accounting activity? Write downs, expenses, salaries, bonus?
• Remember, I mentioned that you need to plan on needing 20% more of the stated investment? I meant it! (Look at Article #7.)
• What's a realistic ROI (return on investment) based on owner validation and the item #19 earnings claim?
• If you were to invest the same amount of money elsewhere, how does it compare?
5. Training and Support
• Have the franchise’s training and support programs and services evolved so that they are updated and current?
• Who is responsible for the training offered by the franchise? Look at the background and experience of the parties involved.
• Get complete clarity on what ongoing training is provided/included and what, if anything, would be considered additional?
• Is the territory exclusive, protected and do you have the first right of refusal?
• Is there a discount if you purchase an additional territory? How much?
• Get full clarity on the franchise organization’s demographic study and zip codes, and ask why they feel the territory in question is suitable.
7. Royalties (on income, not on your net)
• Check the numbers against the industry and similar concepts.
• Are royalties the primary source of income (Review Articles #21 and #8 as well.)?
• Does a percentage of the royalties go into a marketing fund? Who manages that fund?
• Review Article #s 8, 9 and 11 in the FDD on mutual obligations and restrictions.
• Discuss how arbitration is handled should it arise, as well as who pays what. Will it have an effect on running your business? How has the franchisor handled these situations in the past?
• CULTURE, capitalized, because you have to feel like you’re really a part of the company. If you do not, I suggest you move on because you will agonize and not be at your productive best.
In closing, franchising is certainly not for everyone, but it can be a good place to grow your investment, build some equity and enhance your professional experience while doing something you actually enjoy.
Should you need some encouragement to follow your dream of business ownership, here’s just one of many statistics regarding franchising and the enormous opportunities it provides to inspire you…
IBIS World forecasts that industry revenue will grow from $188.1 billion in 2013-14 to $214.6 billion in 2017-18, with an average annual growth rate of 4.5 percent!