7 Things to Consider Before Investing in a Franchise

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Regardless of the investment range, deciding to invest in a franchise business necessitates extensive due diligence. There are specific things to look for.

“A prospective franchisee should be looking for a franchisor that has a good history or reputation of proven support within their franchise system,” says MaidPro CEO, Mark Kushinsky. “A franchisor should supply their franchisees with personalized business and marketing strategies, industry leading technology, top-of-the-line sales teams for franchisees’ prospective clients, and round-the-clock help for the day-to-day questions.”

“The number one ‘must have’ is fantastic training. The reason you’re buying a franchise is to follow a proven system and the only way to do so is to get the proper knowledge and training that is crucial to succeed once you open your doors for business,” says Dave Claflin, President of Franchise Development at Fastest Labs. “Second is ‘culture’. Every business has its own personality, so you must make sure you fit into the culture of the franchise team. You’re essentially entering a marriage when your purchase a franchise, so you want to make sure that you have fun and can enjoy the next chapter of your working career.”

Talking with existing franchisees and reviewing a brand’s franchisee satisfaction survey results will provide you many insights into a specific franchise company. The following are a few key things you should also consider before signing any franchise agreement. With the exception of franchisee satisfaction insight, the information can be obtained from a franchisor’s Franchise Disclosure Document (FDD), which outlines what the franchisor will do for you, what they will expect of you, financial information, information about franchise performance, and contact information for current franchisees as well as those that have recently exited the system. An in-depth breakdown of an FDD is presented via on-demand video segments within our FBR Franchise Buyer’s Toolkit.

Initial Investment Range: The initial investment range of a franchise business is the estimated costs you will incur starting the business. It typically includes the franchise fee, which is a one-time licensing fee paid for the initial term of the franchise agreement, training costs, equipment, marketing materials, and build-out costs for businesses with a physical location. It may also include some allowance for initial working capital. The initial investment is given as a range as there are many variables that can affect it such as local market conditions, size of location, size of territory, etc. These initial costs will be outlined in Item 7 of the FDD. Every business also requires additional capital investment over time. These costs can be significant and vary dramatically depending on the type of business you are investing in. They may include employee training, equipment upgrades, new signage, updated marketing materials, and office furnishings are not included in the initial investment estimates.

Required Net Worth: Many franchise companies have minimum net worth requirements for their franchisee candidates that can be significantly higher than the initial investment itself. Higher net worth requirements are typically tied to your ability to be approved for financing to cover the initial investment, working capital, or other additional capital should you need it. This is an area where you want to be absolutely sure you are well within the franchise company’s recommendations. No matter how successful a franchise business model, you do not want to go into business undercapitalized.

Litigation: Item 3 of the FDD outlines the details of any current litigation the franchise company is facing or bringing against a franchisee or other parties. A long “wrap sheet” of litigation involving franchisees is a red flag.

Gross Revenue vs. Net Income: It’s really important to do your homework when it comes to the financial opportunity of any franchise investment. Franchise companies are not required by law to disclose the financial performance of their franchise locations, but if they do provide unit-level performance data it will be listed in Item 19 of their FDD. Unfortunately, most numbers provided by franchise companies are simply gross revenue numbers (“top line”), which don’t really provide you with any insight into the potential profitability of the business (“bottom line”). Talking with franchisees about their typical expenses will help you estimate the potential profitability of the business. The best franchise companies disclose both gross and net numbers in their FDD, with averages for their entire system.

Terminations and Transfers: FDDs list changes in units over the past three years. This includes new units opened and those that didn’t renew their franchise agreement, ceased operating for other business reasons, franchise units that were terminated by the franchisor (meaning that the franchise agreement was legally terminated and the franchisee is no longer part of the system), as well as units that were transferred to other franchisees. While reputable franchisors must occasionally terminate the franchise agreement of an individual who is significantly under performing and/or not in compliance with the agreement, a high rate of terminations or transfers within a certain time frame should be considered a big red flag.

Franchisee Satisfaction: As you are aware, Franchise Business Review specializes in franchisee satisfaction research. We believe the overall attitude and satisfaction of current franchisees is one of the most critical factors to consider prior to investing in any franchise. We encourage all franchise companies to survey their franchisees annually, and to share their survey results with franchisee candidates. An independent satisfaction report, like the ones available at FranchiseBusinessReview.com, can help you learn what franchisees think about areas that are crucial to a system’s health including training and support, operations, franchisee-franchisor relations, financial performance, and overall business satisfaction. We also urge you to speak with franchisees to hear first hand what their experience has been. Every franchise company will have some level of discontent, but speaking with many different franchisees will indicate if it is isolated or something the majority of franchisees are experiencing.

“Call franchisees, ask them the same questions, and write their answers down as well as how you felt while speaking with them to review later. You want to talk to at least two franchisees who have owned the franchise for different time frames: less than two years, two to five years, for five to 10 years, and over 10 years,” says Jim Giuffre, owner of two National Property Inspections (NPI) franchises in Carolina. Giuffre says his 2015 gross revenue was $225,000 and that he anticipates it will be $275,000 in 2016. The minimum start up investment for an NPI franchise starts at $43,400.

Are You a Good Fit?: It’s important to conduct a self-analysis to determine if you are a good fit for franchising, and if you are, what type of franchise would best meet your objectives. We asked franchisors to tell us what traits they feel their most successful franchisees share in addition to a willingness to follow proven systems.

“Motivation, internal drive, and a plan is what franchisees need to be successful,” says Michael Plummer, CEO of Our Town America, which specializes in new mover marketing. “Motivation, whether it be wanting to get the kids through college, set up something for a good retirement or simply wanting more money is important. Internal drive gets you through those days when it is tough. Planning is key to measuring when you have arrived at a milestone or goal and where to raise the bar to keep you moving towards your objectives.”

“To start any business you must have courage, tolerance for risk, resilience, and persistence,” says Bunchman of Jumpbunch, “Our model also requires great communication and relationship skills, organization, and of course a high energy level.”

“Our most successful franchisees enjoy personal interaction and work well with others; inspire trust and confidence; understand that technology is important and are willing to invest in systems; are open to new ideas and spend time learning new concepts; have a vision for their business and what type of culture they want to create; are good with numbers and accounting doesn’t scare them; love to be hospitable and think making customers happy is fun; can check the drama at the door; feel that they are lucky; and are coachable,” says Kushinsky of MaidPro.

When it comes to what might be the best franchise for you, it’s a good idea to find one that provides a service or product you can truly get behind. Many brands do not require you to have business experience, a particular skill set, or a formal education since they have developed a proven system you can simply execute after going through their training program. Some, however, would be difficult to succeed in if you are lacking experience in particular areas. It’s important to take the time to really understand the business model to ensure it is a good fit.

“To be successful as a business broker, you need to be good at finance, accounting, reviewing legal documents, multi-tasking, negotiating, and communicating both verbally and in writing. If you are particularly weak in any of these areas, this business could be quite frustrating,” says Hendrickson of Murphy Business & Financial. She feels her 15-year career in corporate banking served as a good platform for transitioning into business brokerage. It appears to be the case since she has been recognized as a multi-million dollar producer for the last two years. The minimum start up investment to open a Murphy Business & Financial franchise begins at $57,525.

“You do not need any artistic talent to be successful in our business. In fact, most of our owners have no art background at all. They love entertaining and are go-getters in the community. They excel at managing people, networking and building partnerships,” says Pinot’s Palette Co-Founder and President, Charles Willis.

Each year, Franchise Business Review surveys thousands of franchise owners across North America and publishes a ranking of today’s top franchise opportunities based exclusively on owner satisfaction at FBR50.com. It is an ideal place to start your franchise research.

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As the Editorial Director at Franchise Business Review, Emma Pearson reports regularly on today's top franchise opportunities and the latest trends in franchising. She also writes and oversees the publishing of Franchise Business Review's annual Top Franchises, Top Low-Cost Franchises, Top Franchises for Veterans and many other specialized franchise reports. They feature the only lists of top franchises based on feedback from those who know best - the franchisees who own them.

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