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6 Tips for Evaluating Franchise Opportunities

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Don’t get lost in the maze of franchise opportunities when trying to find the franchise that is right for you.

Franchise OpportunitiesFinding the right franchise often depends on the approach of the one performing the evaluation, rather than the franchise information itself. The way to evaluate and educate yourself on different franchise opportunities can turn into a maze of information if it’s approached in the wrong way. Turn the maze game into a simple connect-the-dots by examining only a few items and you’ll end up with the same results, quicker, easier and with a lot less frustration.

Evaluating Franchise Opportunities With Simplicity

Here are six tips on what to look for when you are evaluating various franchise opportunities. We recommend you always evaluate more than one because you will learn by going through different franchise sales processes.

The Franchise Disclosure Document (FDD)

The FDD is the most important document. It has 23 points on how to evaluate a franchise. Item 19 – Financial Performance, provides the franchisor the option of providing actual financial performance of its franchisees. All litigation against the company and financial statements are listed as well. Almost all information needed to evaluate a franchise on paper is contained in this franchise agreement.

Tip #1: If Item #19 in the Franchise Disclosure Document (FDD) does not provide performance information, this is a red flag. Don’t buy a business without knowing its financial performance.

One-Time and Ongoing Training 

How intensive and how long does the training last? Are you expected to train yourself and staff? Does the franchisor provide ongoing training? If you run into a unique problem, will the franchisor be there to help you out and get you back on the road to profitability? Training plays a big part of any franchise agreement. To get the scoop on training you need to talk with the existing franchisees. Because training programs often change, be sure to talk with franchisees that have operated their franchise for less than one year.

Tip #2: In franchisee interviews, focus on the value of training received by the franchisees – both initial training an ongoing training. The quality of training is often an indicator of the quality of the franchise.

Total Cost of Ownership

Does the franchisor make all costs for ownership of the franchise known at the outset? All advertising funding and any other funds such as equipment rental or upkeep should be known before signing on to any franchise contract. Understanding all the franchise fees is important so you can calculate your cost of running the business.

Tip #3: When examining the total cost, also make sure you know how much cash you will need to fund the business until it becomes self funding. Underestimating the amount of funding needed is one of the biggest causes of failure.

The Business Model

How does the business actually work? What is the target market? What value is delivered to this market? Who is your competition? How is the marketing plan established? Will you, as a franchise owner, be expected to fund the marketing on a local level?  These are a few of the key questions to get you started in asking the right questions. If the franchisor cannot readily answer them, this is a warning flag.

Tip #4: If the franchisor does not have a local marketing plan and strategy for you to implement, this is a red flag. Leads are the life of any business and you need a plan you can implement starting day one.

The Return on Investment

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After the initial investment (franchise fee), franchisors typically receive ongoing monthly payment referred to as royalties. Is the percentage paid to the franchisor reasonable? Can you expect a large return on your investment? Is the territory you’re in so saturated that you will hit a glass ceiling with profitability? Keep in mind, two entities need to make money in this equation, the franchisee (you) and the franchisor. The franchisor is typically getting a percentage of the revenue, so they are getting paid even if you don’t make a profit. So you need to make sure the business can generate enough revenue so you are putting the money you need in your pocket at the end of the day. While franchisees may not give you specific financial data, you can find out if they are making the money you need to make.

Tip #5: Ask franchisees: “How confident are you in percentage terms that the franchise business would enable me to put $_______ (fill in the blank) in my pocket at the end of every year.” Anything less than 90% is a red flag because franchisees are optimistic by nature.

Business Growth

Does the franchise offer a product or service that has the capacity for steady growth? Will the franchise be as popular and in demand in future years or is it a passing fad? Is the competition better poised to succeed and pass your franchise up? You will also want to consider a business that delivers products or services that can weather a down-turn in the economy.  As we have learned, down-turns are simply part of the economic cycle, so you want to make sure you have a business that can survive.

Tip #6: Make sure the franchise can withstand and economic down-turn. Focus on understanding how the franchisees did during those periods of time.

Evaluating franchise opportunities doesn’t have to be brain surgery. Simple business acumen and logic can tell the tale when using these ways to see how the franchise measures up. Listen to your “gut” as you do your evaluation. If something doesn’t seem right, step back and make sure you are looking objectively at the opportunity. Choose good information and by connecting the dots, you will have a good grasp of how to evaluate a franchise to plan your future in business.

About the Author, Daren Coudriet

Daren is the founder and CEO of FranchiseWeb360. He has an MBA from the Pennsylvania State University and has served in the roles of franchisee, area representative and franchisor advisory council member. He has an intimiate understanding of franchising and what it takes to start a business and succeed as a franchisee in today's competitive world.
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