How to Evaluate a Franchise Opportunity

Rishabh Sharma
Rishabh Sharma Jan 28 2021 - 5 min read
How to Evaluate a Franchise Opportunity
In a concept of franchising where everything is based on the relationship between franchisors and their franchisees, building up a strong network becomes more complex and difficult if the franchise is not right for you(according to your skill-set).

The concept franchise offers a proven business model that has been tried and tested over a time period. Franchisors allow it’s franchisees to own and operate under that proven business model and trademark. There are always a set of rules and guidelines implied by the franchisor in place to ensure that every franchise is falling under the same roof. Consistency is the soul of a brand and one of the key factors why franchise systems succeed, it’s the thing that attracts the customers.

Let’s examine some other considerations when first evaluating a franchise opportunity:

1. The Market-

Before jumping to any conclusion regarding your franchise business ask yourself the following questions such as, has a defined market been determined? Is that market in the growth phase or is it in decline? Understanding with complete certainty who you will serve helps to determine the viability, and ultimately the profitability, of the franchise.

2. Brand History-

Have deep research about the brand or company and their management of franchise along with those who will be supporting your business should provide you with some insight into the brand’s culture. Look for stability and experience, as franchising is competitive and you want the best team as your partner. Make sure to begin your research from Franchise Disclosure Document (FDD), all the franchises will file an FDD; it contains the full business details. Be aware that the FDD is not forwarded until you have moved along in the discovery process and the franchisor has determined you are a qualified and serious candidate. 

3. Financial Statements-

Article 21 of the FDD contains the franchise’s financial statements. Review them, question them, and consider having a CPA look them over. Ask each and every possible question you have to avoid further issues regarding the same.

4. Capital Required-

Know your budget before investing everything in the franchise, know how much you can comfortably invest. All the franchise brands will look at your liquid capital, your assets-to-liabilities, and your net worth. If you come in undercapitalized, you are more likely to fail and drain the resources of the franchise company, and the franchise is like an ecosystem built for the collective good of all the owners. Be honest with yourself and the franchisor about what you can invest in.

5. Training and Support-

Look for support and training system offered by the franchisor. You want and need guidance based on how actually the brand is performing in the market in terms of services, training, and support. Also, speak with the other franchise owners in the system and learn from their experience. These owners are a valuable resource and can provide you with concrete solutions to real challenges. You can avoid future mistakes by taking feedback from other franchises.

6. Market-

Franchising brands are redefining their metrics when carving out territories in their respective markets. Depending on your industry and business, look for what’s trending in your market and the preference of your customers plays a major role in the same. Is that territory experiencing growth or decline? Make a visit to the markets of your brand’s specific industry and speak with someone in planning or zoning. Ideally, the franchise company will want this to be a win-win situation; otherwise, everyone loses.

7. Royalties-

The franchise should be making money on its royalties, not by providing owners with “other” services. Many of these other services are to third-party vendors and constitute a pass-along expense. A number of franchisors will reward their owners with a sliding royalty scale based on revenue: the more you earn, the less royalty you will pay. Also, look at minimum royalty payments and see if they’re enforced.

8. Restrictions-

There have to be some restrictions in order to protect brand identity and consistency across the franchise system. Make sure you understand these issues carefully. Discuss with your franchisor and always have legal support on your side in case the franchisor does not show you the full picture.

9. Is it for The Long Run?

Depending on the organization, a franchise agreement lasts generally anywhere from 5 to 15 years. It’s very expensive to back out once you have signed your agreement. Suitability encompasses a personal inventory of your core strengths and skills, and whether or not you will fit with the franchise culture you will be partnering with. Do you see yourself doing this for a long time?

10. Exit Strategy-

Always be and think two steps ahead. What if you get ill or have a personal crisis? Plan on how you would exit before joining the venture, whether that would be selling or transferring the business. Keep in mind there are costs to both so ask about those costs upfront and clear your doubts.

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