Which Franchise is Right For You? Follow These Steps
When a couple I know, Mark and Andrea, decided to give franchising a try, they knew a few things for sure. First, they wanted something that made use of their experience working for Fortune 500 companies. They wanted something that wasn’t a fad. They didn’t want to make too large of an initial investment. And, finally, they wanted a company that took a unique approach in its marketplace -- something that offered an established product in a new, more efficient way.
They spent months researching options, then zeroed in on a mobile flooring concept that ticked all their boxes. Before pulling the trigger, however, they spoke with more than 20 different franchisees to find out what it was really like being a part of the company. Only then did they buy in -- and not surprisingly, their business succeeded.
As someone who deals with franchises all the time, I think they did everything right. But I’m surprised at how many people do it wrong.
I appreciate the challenges. It’s easy to be paralyzed by choice or jump in without fully understanding what you’re getting. That’s why, once you’ve determined that franchising is for you, you should start by laying out the three most important facts: the amount of capital you have available to invest, your risk tolerance, and the amount of leverage (credit against your assets) you can and should get.
Then it’s research time. Here are a few rigorous steps to take next.
Step 1 / Develop Your Short List
Many potential franchise owners have no idea what industry they want to enter, let alone what business. That’s why, like my friends Mark and Andrea did, I suggest sketching out some broad outlines of the type of business or industry you’d like to enter. Also, ask yourself some basic, honest, personal questions, like “Will I have fun doing this kind of business?” You’ll need to love it; you’re making a commitment that could last decades.
Once you do that, you can identify a list of all likely franchise contenders. Online franchise portals are a great place to start, but many list only franchisors that advertise. At the time of this writing, some of the more comprehensive portals include Franchise Direct, Franchise Gator, and, of course, Entrepreneur’s Franchise Hub (Entrepreneur.com/franchises).
Use a successive series of finer and finer filters to narrow your list of companies under consideration to a handful—two dozen at most. Your first round of cuts must include an honest discussion with yourself about exactly what you’re buying. If you ask an experienced franchise salesperson what sells franchises, they will tell you it’s emotion—particularly for first-time business owners. People just feel that it’s the right match for them. That may be fine, but it can be dangerous to make such a big decision on emotions alone.
For example, I once heard a story of how Popeyes sold a franchise to a doctor who had been eating its chicken for years. Apparently, he had recently moved and loved Popeyes’ food so much that he had to have a restaurant in his new hometown -- even if he had to buy it himself. The doctor was apparently happy with his decision, but many franchisees are not so lucky. They fall in love with the product, buy the franchise, and then wonder why they don’t succeed in business. The answer may be that the product is wonderful but the fundamentals of the business are not. You need both to work.
So, how do you know? Start by thinking about all the things you’re really investing in. When you buy a franchise, you are not buying the chicken, the fancy new vending machine, the bagel oven, or the virtual reality game; you are investing in a business system. You are investing in the support of the franchisor’s management team. You are investing in the franchisor’s track record and history of success. You are investing in its marketing system. You are investing in the future of its market. Are all those things a match for you? It’s time to find out.
Step 2 / Go Deeper
Once you have determined that you do want to invest in a business system -- and not, say, just the romantic idea of business ownership -- then you need to start researching potential franchises. The internet, while useful as a screening tool, can never give you the same feel for a concept that you can get through other, more personal means. There are better ways to gain insight.
Here are a few places you can consult:
Franchise brokers. A franchise broker’s entire job is to match potential franchisees with the right franchise. It sounds helpful -- and it can be. But before you decide to work with a broker, you should understand how their business model works.
First of all, a broker can go by many names. They often call themselves franchise consultants. They’re also known as part of a lead-referral network, or LRN. These people may represent a hundred or more franchisors -- but keep in mind that they typically only recommend franchises they directly work with, because that’s who ultimately pays them. (You don’t pay for this service; the broker earns typically $20,000 every time one of their clients buys a franchise.) That means you’ll get only a limited set of options from each broker, and their goal will be to sell you on one of those options.
If you work with a broker, he or she will qualify you -- both as to your capitalization and the speed of your decision-making process. They will then lead you through a self-evaluation process to narrow your list of franchisors to perhaps three to six -- and will introduce you to all the names on your short list. At that point, they will pass you off to individual franchises’ salespeople.
Trade and industry shows. Consider attending franchise trade shows, and if you are looking in a specific field, attend industry shows. Franchise shows will give you an opportunity to speak with several hundred franchisors from a variety of industries in just a couple of days.
Many offer seminars on all aspects of franchising, such as industry trends, understanding contract provisions, veterans’ franchise programs, financing, and overall success as a franchisee. The shows also have vendor exhibitors who might help you as you move forward with your franchise investment, in areas such as finance, real estate, insurance, and franchise law. The exhibitors at these shows tend to skew slightly toward younger franchises and those with lower investment levels.
Reputation. Search the internet for general information on any company you’re considering. Don’t just search for the companies by name. Also search for risk-related search terms like default rate, franchise failure, or litigation. While much of this information will be included in the franchisor’s Franchise Disclosure Document (FDD), a legal document franchisors give to potential franchisees during the presale disclosure process, these searches might lead you to details that will not be found there. (But be careful: Blogs and review sites can be informative but may also contain incorrect information.)
The franchisor itself. Your first (and hopefully best) source of information on a franchise company will be the franchise company itself. It will typically be able to provide you with a wealth of material, including its FDD, franchise brochures or other promotional materials, links to franchisee testimonials, and perhaps data on the industry in general. If you are interested in a particular franchise, reach out to it directly.
First-time franchisees might be intimidated or uncomfortable speaking with a franchise salesman, and asking for all this information might feel overwhelming at first. But don’t worry. In the best organizations, the salespeople (who are generally called franchise development officers) are accustomed to working with people who may be new to the process and perhaps a little nervous. Most of these development officers will not be pushy or overly aggressive, but you can expect they will attempt to qualify you on the first call. Most will ask you to fill out a confidential information request form (known as a CIRF) and discuss their process for mutual evaluation.
Typical qualifying questions will involve your capitalization, desired geographical region, and timetable for deciding. Assuming you are serious about investing in a franchise, you should be frank with your answers. If you understate or overstate your available capital, or are vague about your timeline, you may ruin the budding relationship.
Assuming you have the necessary capital, the franchise development officer will often then try to set a time frame for you to make a decision and will propose a series of steps that both sides will go through to learn more about each other. Those may include a call to review the FDD with you, visiting certain locations, connecting you with other franchisees, a franchise representative speaking to your banker, and more. The process may feel somewhat contrived or artificial, but take advantage of it. This is a good way for you to learn if you’re making a good decision.
These franchise development officers often say they’ll “give you permission to say no” at any time during the process. The best ones encourage it; they don’t want to spend their time chasing after you if you have already decided to move on. Let them know as soon as you decide to cross them off your list. It will make their lives easier -- or give them a chance to address your concerns.
Step 3 / Sniff Out the Competition
Once you really narrow the search to a few franchises, it’s important to visit their competing businesses -- both franchises and independents -- in your community. Talk to competing franchisors so you can hear how they position themselves against your target franchise. If there are significant franchise competitors that have not yet entered your local market, do your homework on them as well. They may end up being your competition in a few years.
Visit any local establishments that are in the same general segment you are considering. Visit them at different times. If a business is likely to be busy on the weekends, go in during some off-peak hours. Talk to the staff, who are often surprisingly willing to share information about how the business is doing.
Visit locations for your target franchisor in some more distant markets. See whether they are all run in the same manner. Do they offer the same products and services, and at similar prices? Are their locations laid out the same? Are they all clean and well-run? (If your first reaction when visiting a target franchise is I can do a better job than they do, that is not a good sign.)
Get a feel for what the owner or manager of the franchise does on a day-to-day basis. What may appear glamorous when reading about it on the internet may turn out to be more mundane than you’d prefer.
As a last step, consider working with a market analytics firm. These firms will, for a small fee, provide you with a market analysis of the demographics of the area and of the local competition. And some of these firms will indicate whether your market segment, at least in general terms, is overbuilt or underbuilt. The best franchise in the world probably won’t be successful for you if the market is already saturated.
Step 4 / Get Down to a Final Few
At this point, you may have a handful of companies you like -- which means you’re at risk of analysis paralysis. I see many potential franchisees freeze up here, unsure of which to pick. So to narrow your list further, you’ll need to find additional reasons to filter companies out. Here are some to consider:
→ Size of the franchisor
→ Age of the franchise system
→ Strength of the management team
→ Financial strength of the franchisor
→ Competitive nature of the market
→ Dozens of other potential factors
Obviously, none of these filters come with right or wrong answers. Instead, they’ll just help you identify the opportunity you’re comfortable with. For example, if you’re evaluating the length of time a franchisor has been in business, you’ll need to know that franchisors who have been in business for some time have probably refined their operating systems and their franchisee support capabilities. On the other hand, these franchisors may be in mature markets and may be priced in accordance with the reduced risk associated with them -- in other words, high. They may also not be as cutting-edge as a newer market entrant. If you choose to use this screen, you may be choosing to decrease risk at the expense of return. There is nothing wrong with that, if that is how you are temperamentally inclined.
Like franchisor age, its size will have several advantages. First, a larger size will bring with it certain economies of scale. If, for example, the franchises you are considering will be assisting you in purchasing product (either through direct purchasing relationships or through negotiated discounts), you should know that bigger franchises have stronger negotiating strength. Larger franchisors offer other economies of scale as well. They typically will have significantly better name recognition, thanks to a larger advertising budget. The disadvantage to larger franchisors is much the same as it is for older franchisors: Less risk may come at the cost of a lower return.
If, after you’re done with this final screen, you still have several candidates, don’t worry. What comes next is a numbers game: You (and hopefully your accountant or lawyer) need to take a deep dive into the final contenders’ finances and operations. You’ll learn a lot there, and likely find the company that best matches your risk tolerance.
By this point in the process, all this rigorous preliminary legwork will really be paying off. You’ll have a list of candidates that are truly likely to be the best fit for you. Your journey here is only beginning—but you’ve set yourself up for success