These Are The 5 Critical Factors to Consider Before You Buy Your Franchise It's a lot easier to leave a bad job than the wrong franchise. To determine which opportunity is right, you have major research and interviewing ahead.
By Dan Rowe Edited by Carl Stoffers
Key Takeaways
- The decision to buy into a franchise should be influenced by your passion and understanding of the industry.
- It's crucial to delve deep into the numbers, like initial investments and ongoing fees to determine what you can and cannot afford.
- Operating a franchise in a sector that you are knowledgeable about can greatly enhance your chances of success.
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Congratulations, you've decided to build generational wealth by acquiring your first franchise business. In most categories, such as food service, retail, or medical services, you have more than one option for investing in a franchise. It's a lot easier to leave a bad job than the wrong franchise or a bad lease. To determine which opportunity is right, you have major research and interviewing ahead. Here are some things you should consider.
The numbers
Every franchise lists its estimated start-up costs either online or in an easily available document, including its fees and royalties, construction costs, real estate and more. If that's not available, run fast. If it is, honestly assess what equity you can contribute and how much you can borrow. Each franchisor should also list a franchisee's potential profit in Item 19. Carefully compare item 19s of various franchises you are considering and, as you check references with existing franchisees, double check those numbers.
The franchise should be so successful that you want to re-invest to open more locations. The very best franchises self-fund new locations, compounding your investment. Imagine paying to open the first three locations and then those three locations finance three more. Those six units fund six more, and so on. This creates generational wealth.
References and growth
Are existing franchisees so happy with the franchisors and their investment that they are opening new units? If not, run. This step also helps you find mentors. Success leaves clues, and you can learn from the successes and struggles of existing franchisees to ensure your profitability.
If the franchisor is not opening more locations and investing in the best possible people and processes for franchisee success, sprint for the hills. The franchisor knows better than anyone else the success of each location.
Which industry?
We once saw a potential Halal Guys franchisee ask if he really had to use halal ingredients — it's in the name and a faith-based dietary law. (Guess who didn't get the territory?) Your passion, or lack thereof, will be contagious. I suppose a vegetarian could successfully operate a hamburger business, but why?
Know the industry and the trends, especially so you understand the franchise's position in the industry. Perhaps you're a restaurant manager looking to become an owner — or the master franchisor for a territory. We have clients who operate multiple food service brands — they already understand the business and the importance of a playbook.
Alternatively, maybe you've been in the restaurant sector forever and never want to see a fryer again. Or you're a corporate executive who wants to deal with people, there are options. We're working with a team who have operated multiple restaurant brands for years, and now are opening GLO30 skin care units. We also have several food franchisees opening PayMore Electronics stores and who swear they won't open a restaurant franchise again.
Brand reputation
The best time to become a franchisee is early in the life of a business — it was a lot more profitable to buy McDonald's restaurant number 50 than 25,000. But you may not want to be store number 5, either. Ask about the expansion plans, how other franchisees have fared — and what they think a franchisee needs for success.
Research both the business and its leadership. Google the business, find some franchisees and speak with them. Most will be happy to talk about their experiences — if you succeed, it will only enhance the brand of their units.
Related: How Immigrating From Argentina to the Bronx at 11 Prepared Her For Life as a Franchisee
Support and exit strategy
The point of buying a franchise is that you are buying an established business model, and the guidance and materials needed to launch and run it. Make sure those support services and materials are up-to-date and are what you need for your particular business. Begin by checking the culture of the business. Is there a spirit of collaboration in the franchise? Are franchisees encouraged to speak to each other?
Regardless of your experience level, you want communication with the C-suite. Will corporate reply within a reasonable time, or are they just interested in your royalties and fees after the training period? As you become successful, are they open to your ideas?
Remember, the first bite of the apple is a large profitable franchise business giving you a life you only dream about. The second bite of the apple is the day you sell this business for 7-10x your annual earnings, creating generational wealth. You need to know how to best shape your business to eventually be acquired. Always keep this option in the back of your pocket — and on your mind.
Smart Franchising with Fransmart
We discuss this and other topics on our brand-new "Smart Franchising with Fransmart" podcast, which launched on April 2, during my conversation with industry legend Greg Flynn. Flynn is the Founder, Chairman and CEO of the world's largest operator of quick-service food franchises, Flynn Group LP, which is diversifying into Planet Fitness locations.
It's the first of 10 weekly podcasts with guests including Don Fox, former CEO of Firehouse Subs, discussing his 50 years in the restaurant industry; Patrick Galleher, Managing Partner for investment bank Boxwood Partners, who has led transactions for multiple franchise companies; and Aicha Bascaro, Founder and CEO of The American Franchise Academy. You can subscribe here.
Finding the ideal franchisor isn't much different from the ideal new job — but remember, you're not buying a job, you're buying a strategy to life-changing wealth. In time, you won't be managing one unit, but keeping tabs on the people who do it, and who pay you to do so. The process begins with time, research and some honest conversations.
