The 8 Things Franchise Investors Want to See in Your Business If you're looking for investors, these are the 8 things they are looking for in your franchise business.
- Investors evaluate prospective franchisees based on eight critical elements.
- Investors should assess the potential for growth, both of the franchise itself and the franchisee.
- Particular attention is given to the market saturation, competitive advantage, and the potential to navigate unexpected challenges.
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By the time 2023 ends, there will likely be more than 800,000 franchises across the US, meaning investors have a near-endless array of options for income stemming from one of the most reliable sectors on the planet. And they're definitely weighing those options. In a May 2023 study, my team uncovered a pattern showing that investors, regardless of age, location, or gender, are increasingly considering alternative investments, with 53% of those surveyed actively adding alternatives to their portfolios — and across the board, their interest in business alternatives, like franchising, outweighs crypto and NFTs.
So what are they looking for in a franchisee? It's a question I get all the time. Here's the answer: There are eight critical elements that set the best franchisees apart in investors' eyes.
This sits at the top of the list for obvious reasons, but an investor is looking far beyond the number of customers who come through your door or the number of pizzas you sell every day. They're also evaluating how many employees you'll need, what kind of inventory you'll need on hand, and if any sourcing requirements could drive up the cost. Your buildout cost also comes into play. Are you buying an existing franchise location or do you need to remodel the space from scratch?
Investors can look at this from two angles: the overall growth of the franchise itself and your specific growth as a franchisee. In both cases, an investor will ask several questions. How rapid is the growth? Is it as efficient as possible? And is it sustainable?
Expect big questions about your growth strategy too. Is it systematic? What does your business plan look like? Your marketing plan? Your financial projections? What about your big picture? What's next for your franchise empire after this location?
If you're trying to open the town's one-hundredth burger joint, investors may shy away simply because the market is saturated with similar offerings. You may think you have a solid differentiator, but the community thinks burgers are burgers.
Or, the franchise brand itself may be saturated in your market. If the same coffee shop already has six locations in a ten-mile radius, an investor will likely view your growth potential as limited.
While investors will certainly want to learn more about your abilities as a leader, they will also dig into the leadership of the franchisor. Who's the CEO and executive team? What's their experience in this franchise and the space as a whole? Will they be able to provide strategic guidance in good times and bad?
It works downstream too. In fact, I always say the first thing a franchisee needs is a great general manager. Someone who can manage and motivate employees, who also has a clear understanding of your industry. As your franchise empire expands, you simply don't have the time to ensure each location runs like a Swiss watch — but that's no excuse for them not to. You need to excel at finding quality leaders and then delegating to them. Without the right leaders on your team, you can't expect investors to have a ton of faith.
That Swiss watch effect needs to trickle all the way down. In addition to great leaders (yourself included!), investors want to see simple operations and an employee headcount that isn't bloated. Show efficient manageability in your existing franchises, and you're more likely to get investor financing for your next one.
Take a spin around the 'net and you'll see all kinds of advice articles on how to avoid investment fads. Good investors don't make decisions based on FOMO; they want sustainable investments that are good for the long haul.
As much as we all dig creativity, the most solid, longest-lasting franchises are the tried and true favorites — like automotive shops, hair salons, and quick service restaurants. No matter what dark clouds the economy brings, people will always spend money on these services. In fact, in some cases, a down economy actually increases the demand for them. For example, consumers are more inclined to fix their car than buy a new one or treat themselves to a quick service dinner instead of a fancy restaurant.
Your competitive advantage can come in many forms, and investors will be curious about them all before handing over any money. Maybe your franchise brand has a differentiator that the competition truly can't replicate. Maybe the brand is so recognizable that it creates a natural advantage (golden arches anyone?). Maybe its mission really resonates with consumers, like giving back to the community. Maybe your next franchise just has an awesome location that's a natural traffic magnet, like the first gas station everyone sees when they're getting off at the busiest highway exit in town or the sports bar across the street from the local team's stadium.
How well do you and your team pivot? Is your operating model built with resilience in mind? Whether it's a change in the economy, a change in customer demand, or a change no one saw coming (hello, pandemic!), resilient franchises are much more appealing to investors. They want to know you're ready to jump in with Plan B, C, or D at a moment's notice.
Don't just focus on the big fish
Sure, an investor who's going to spend tens of thousands of dollars may have more questions than someone who is only spending a thousand dollars on a crowdfunding platform, but money is money. Everyone wants to get the most out of theirs. Don't assume that smaller investors equal less due diligence. And quite honestly, if you can't tick all of these boxes, perhaps you need to rethink your potential franchise.
There is no shortage of franchising opportunities. Make sure each one — whether it's your second or your twentieth — is the perfect fit for you and investors of all sizes.