How to Evaluate a Franchise Investment
The best thing about any franchise investment is the convenience that it affords any up-and-coming business owner. For most franchise opportunities, the groundwork has already been laid, the business has been tested and improved through time, and operational requirements are easy to prepare.
However, with the sheer number of franchising opportunities abound, you need to evaluate a franchise if it’s worth your time, effort, and money. In short, choosing the best franchise requires careful assessment and evaluation in order to fit your business needs.
Tips in Evaluating a Franchise Investment
Know the factors to consider
It’s going to be a lot easier to select the best franchise business, if you zero in on the following factors:
- Product or service: Does the franchisor have a product to sell or service to offer that you are interested in? If you are not invested – financially and personally – into the product or service, the franchise opportunity is probably not a good fit for you.
- Cost: Buying a franchise requires significant initial cost, as well as running expenses for operational needs. Check if your budget allows all of these financial demands.
- Target market: If you have a specific demographic or set of people in mind to cater, make sure that the franchise fits with your plan. For instance, an ice cream franchise will probably succeed when you’re targeting kids and families.
- Staff support: Most franchise opportunities offer training for your employees and initial operational setup for your store.
Check the success of the franchise
A franchise investment is going to be worthwhile if it already has a good track record and significantly high profit.
Ask the franchisor about existing store locations and take some time to visit a few of them. Having a lot of stores already says a lot about the success of the franchise, but it’s still a good idea to ask the franchisees about their experiences in terms of profit and their working relationship with the franchisor.
Pro Tip: If the franchisor refuses to hand over a list of its current franchisees, walk away and never look back. This is a clear sign that the franchisor may be hiding something or doesn’t work well with the franchise owner. You definitely don’t want to work in that kind of environment!
You may also ask the franchisor for ballpark figures of their financial statements. This can form the basis when you evaluate a franchise in terms of financial stability.
In short, choose a franchise that is stable, future-proof, and potentially expanding.
Check if the franchisor is committed to your success
One of the best determining factors for the success of any franchise is a good working relationship. Try to evaluate how the franchisor treats you, from your first inquiry to the last few arrangements prior to buying the franchise. Based on your experience in dealing with the franchisor, you can already assess the kind of relationship that you will be entering into.
A good measuring stick to check the intentions of the franchisor is to ask a lot of questions. I mean, really ask A LOT of detail-oriented questions! A good franchisor will be more than happy to accommodate your queries, even without the assurance that you’re going to venture into a franchise investment.
Check the franchise documents
Similar to any kind of business, opening a franchise business requires a ton of paperwork. This includes financial statements, legal documents, business permits, and local zoning and health requirements.
One of the unique files that separate franchises from other types of businesses is the franchise disclosure document (FDD). This intimidating file may run more than 50 pages that delineate complete information about the franchise.
Some of the stipulations in the franchise disclosure document include the following:
- Franchisor details, such as owner name and business / brand name
- Franchise / company history
- Financial profile and history of the franchise
- Complete list of franchisees
- Franchise opportunity details
- Comprehensive detail of expenses
- Commitments of the franchisor
- Expectations from the franchisee / franchise owner
- Franchise agreement or contract
Reading and understanding this document is extremely important. In this way, you’ll know what you’re getting yourself into.
Don’t be intimidated by the paperwork. Instead, have the assurance that these requirements will protect not only your franchise but also the entire business or brand. Remember that when the entire franchise company succeeds, you enjoy the benefits of the positive reputation as well.
Predict potential challenges along the way
Buying a franchise may sound easy, but you shouldn’t be complacent especially in terms of future difficulties. Most startup businesses go through testing – probably less for tried-and-tested franchise companies – and so you need to be prepared for this.
Some of the most probable difficulties include:
- Suppliers: If the franchisor requires you to get your consumables from a particular supplier, you don’t have the liberty to shift to another supplier even if the current one experiences problems.
- Scope of territory: Check the restrictions of opening up your franchise business in terms of location. Does the franchise contract require you to steer clear of other franchisees for a specified amount of distance? This stipulation may affect your intended location, and consequently your potential market reach.
- Startup delays: The process of setting up a franchise business may not flow as fast as you would like it to go. Aside from having to wait on local permits and requirements, the franchisor may take some time to start staff trainings or send your supplies.
Seek advice from experts in the field
You may feel like you’ve covered all of the bases in evaluating a franchise, but there’s a slim chance that you’ve missed one or two major financially threatening factors. The best way to protect yourself from this threat is to ask advice from business experts.
As a franchise consulting firm, MBB Management has years of professional experience in its arsenal. Feel free to reach out to us for advice on franchising opportunities. We can refer you to the best franchise companies so that you can start your own business in the quickest, most convenient, and most hassle-free way possible.