What You Really Need to Look for When Considering a Franchise
Buying a franchise is a fantastic way to become a business owner. If you’re interested in acquiring one, many people will offer to help. All of them have an interest in your purchase, typically a percentage of the sale. It’s a market like any other.
But a franchise is a major purchase. Your decision should be based on your or your family's interests in mind. You need to be able to look past the hype, promises and tactics to find the opportunities that are best for you. That requires knowing what factors really matter when evaluating options.
Most articles about franchise selection outline the obvious considerations. You want something you find interesting and something affordable. You want to work with an accomplished franchisor who provides good training and ongoing support. You want to read their Franchise Disclosure Document (FDD) to explore all the nooks and crannies of the business. You need to crunch the numbers to get a better estimate of the costs to run the business in your area.
Many people start by looking at the published lists that rank franchise brands overall or by sector. Entrepreneur’s own Franchise 500 is one of the most popular and a great source of information. However, these lists rank brands based on their own criteria, not yours.
You can also enlist the help of a franchise broker or consultant who can match you with good options. They’ll do a lot of legwork and narrow down the choices, all at no cost to you. But it’s still on you to evaluate these options and make a choice. To make the right choice, consider the following factors.
Putting the desire for money aside, what else do you care about? What gets you excited? What makes you proud? What kind of lifestyle do you want? Before looking outward for opportunities, look inward for the values that are most important to you. Rule out any concept that doesn’t directly support those values. A franchise isn’t just an investment. It’s a lifestyle. You’ll run it better if you enjoy it.
This aspect of a franchise is less measurable but certainly felt. It’s all of the human factors of the organization. How well do people get along? Is there a clear mission beyond making money, and how is this mission communicated and operationalized within the system? Do franchisees collaborate as well as with the home office? Culture is as important as the concept. Look for brands with happy, enthusiastic franchisees who praise their franchisor and work well with other owners.
Is the brand selective about whom they sell to, or will they welcome anyone who’s financially qualified? You’re not just selecting a business. You’re also choosing your partners. That includes other franchisees. Who else is representing the brand? Their performance will directly impact your business, both in terms of image and in terms of long-term value. At some point, you’ll want to sell your franchise. The better its global reputation, the more your location(s) will be worth. Make sure you’re joining a club that’s exclusive enough to ensure its members are good for the greater whole. Great brands have standards. If the franchisor will sell to anyone, be careful.
To be a strong franchise, a business must be more than successful; it must be replicable. “Ground floor opportunity” is a positive way of saying unsubstantiated. If they’ve only built one or two locations — and don’t get me started on a franchise that hasn’t even opened one — they haven’t proven the concept. You want a franchise that has several open locations showing positive growth in different markets. Projections about what might happen are not as useful as reports about what has happened. And while a newer company may have more opportunities for you, most of their major learning still lies ahead. The whole point in buying a franchise is to avoid experimentation and just do what’s been proven to work. New companies are still worth looking at, but be careful about paying to be their guinea pig.
Reliance on royalties
On top of initial franchise fees, most brands generate revenue by collecting a percentage of sales from each franchisee, 5 to 6% on average. Some profit by selling supplies to franchisees. Others collect rebates from required suppliers. These practices are common in franchising, though not every franchisor engages in all of them. Ideally, you want a franchisor whose interests are aligned with yours. That means they’re less focused on selling to you than they are on helping you sell to customers. Read their disclosures, ask current franchisees, and ask the franchisor directly about their revenue model. Make sure they’re working to make money with you and not just from you.
Franchisors collect a percentage of your gross sales, whether you’re profitable or not. The best brands still concern themselves with your financial well-being. They want you to make money, and they want that to happen even with only one location. While expansion is the key to big money in franchising, it shouldn’t be necessary to scrape out a good return. If the concept is sound, that should be reflected by a respectful unit-level ROI. Ask how much data they collect about franchisee profits and what they do beyond promoting gross sales to make sure you have money to take home.
This is your opportunity to talk with existing franchisees. Franchisors will probably give you some names to call. Like all references, they’re probably franchisees they know are satisfied. Try connecting with a few others to get a wider perspective. But remember, their feedback is based on their perspective and values. The way they feel about the business isn’t necessarily how you’ll feel. So avoid asking questions that yield subjective answers, like:
- Do you enjoy running the business?
- How stressful is it?
- Is the franchisor supportive?
The answers will say more about them than the opportunity. Instead, ask questions that reveal facts or at least shed light on the inner-workings of the brand, such as:
- What does the franchisor do to build culture?
- What does the company do to support your ongoing success?
- How much money did you actually spend to open? Were there any expenses you didn’t expect?
- How long did it take you to become profitable? How are your earnings compared to your expectations?
You might also ask about what’s worked and not worked for them, with questions like:
- What are the advantages and disadvantages of your location/territory?
- If you were to open another location, what would you do again and what would you do differently?
- What sales and marketing strategies have worked for you?
Like all reviews, don’t rely too much on any one source. Get as many perspectives as possible.
Room for expansion
The real money in franchising is in running multiple territories/locations. As much as you want to avoid failure, you also want to plan for success. If your first business does well, you’ll probably want to expand. Many brands will allow you to purchase development rights, enabling (requiring) you to open multiple locations within an agreed-upon timeframe. You may want to lock this in upfront. Or maybe you want to open one location and see how it goes. Either way, make sure there’ll be options for you to grow if you choose.
Consider how dependent the concept is on specific conditions that are out of your control. While something as extraordinary as a pandemic is hard to plan around, over the course of a 10-year franchise agreement, it’s reasonable to expect to operate through changing economies and markets. Some franchise concepts are more vulnerable to these changes than others. What industries are you looking at? How much are their sales tied to the economy? Are they an "essential service?" Do they rely on an in-person experience or can customers be served remotely? No business will thrive in all conditions, but hopefully, you can find one that can be profitable in most situations.
Whatever you decide, start your search within yourself. Be clear about the lifestyle you want and what’s important. No one else can make that determination. Remember that even if you’re financially successful, you’re going to pay a price for that profit. It’ll cost you time you’ll never get back. But if you choose wisely, you’ll improve your life while having the time of your life.