How Can I Determine the Success Rate for a Franchise?
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My brother and I are considering several businesses, including a wholesale auto parts company and a finance company. Though they are vastly different, we have interest in each. We're just beginning to look around now and this is new territory for us. How can I determine if I should make the investment?You're focused on an important component of investigating any franchise -- the success rate. Assuming that by "success" you mean how many units don't fail, this is easy to determine. In Item 20 of the disclosure document the franchisor is required to provide you (the Franchise Disclosure Document, or FDD) you will find tables that identify every unit that has failed, been terminated or transferred during the past three years. You'll also find the last known contact information for any failed franchisee so you can pick up the phone and hear his or her story.
On the other hand, if your definition of "success" is broader than just lack of failing, as I think it should be, then finding the answer is a bit more work. Assuming you consider success to imply achieving both financial goals as well as personal goals, then you'll have to visit with a number of the existing franchisees in the system to learn more about their life and experiences to get the information you'll need.
There are many businesses that make money and don't fail. Some might match up well with you so you'd be happy conducting the franchisee role in the business, while others might make you miserable in spite of your financial success. Think of it like a job -- most people have had jobs that they succeeded in and made good money but were not happy doing. This is the same dynamic.
Take the time to find out about a day in the life of the typical franchisee and make sure you'll be interested and satisfied in the role they are describing. If that's the case then you've found a franchise that can provide not only financial success but personal as well.
Related: The Anatomy of an FDD
Related: How Risky is That Franchise?