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What to Actually Look For When Contemplating a Franchise

March
7, 2021

8 min read

The opinions expressed by the entrepreneur's contributors are their own.

Buying a franchise is a fantastic way to become a business owner. If you are interested in getting one, many people offer help. All of them have an interest in your purchase, usually a percentage of the sale. It's a market like any other.

But a franchise is a big buy. Your decision should be based on your family's interests. You need to be able to look beyond the hype, promises, and tactics to find the options that are best for you. To do this, you need to know which factors are really important when evaluating options.

Most franchise selection articles outline the obvious considerations. You want something that you find interesting and affordable. You want to work with an experienced franchisor who has good training and ongoing support. You'll want to read the Franchise Disclosure Document (FDD) to explore every nook and cranny of the business. You need to summarize the numbers to get a better estimate of the cost of running the business in your area.

Many people first look at the published lists, which categorize the franchise brands overall or by industry. The Entrepreneur's Franchise 500 is one of the most popular and a great source of information. However, these lists rank brands based on their own criteria, not yours.

You can also enlist the help of a franchise broker or advisor who can provide you with good options. They will do a lot of leg work and narrow down the choices, all for free to you. However, it is still up to you to evaluate these options and make a selection. Consider the following factors to make the right choice.

Your values

What else do you care if you leave aside the desire for money? What excites you What makes you proud What kind of lifestyle do you want? Before looking outward for opportunity, look inward for the values ‚Äč‚Äčthat matter most to you. Exclude any concept that does not directly support these values. A franchise is not just an investment. It's a way of life. You'll make it go better if you enjoy it.

Related: 4 Steps To Improve Your Corporate Culture In 2021

Corporate culture

This aspect of a franchise is less measurable, but certainly felt. It is all of the human factors in the organization. How well do people get along? Is there a clear mission beyond making money, and how is that mission communicated and operationalized within the system? Do franchisees work with both the home office? Culture is just as important as the concept. Look for brands with happy, enthusiastic franchisees, who praise their franchisor and who work well with other owners.

selectivity

Is the brand selective about who it sells to or will they welcome someone who is financially qualified? You don't just choose one company. You also choose your partners. That includes other franchisees. Who else is representing the brand? Your performance has a direct impact on your company, both in terms of image and long-term value. At some point you want to sell your franchise. The better the global reputation, the more your locations are worth. Make sure you join a club that is exclusive enough to ensure that its members are good for the bigger picture. Big brands have standards. If the franchisor is selling to someone, be careful.

track record

To be a strong franchise, a company has to be more than successful. it has to be replicable. "Ground Floor Opportunity" is a positive way of saying unfounded. If they've only built a location or two – and didn't get me to start a franchise that hasn't even opened one – they haven't proven the concept. You want a franchise with multiple open locations that are growing positively in different markets. Projections of what might happen are not as useful as reports of what happened. And while a newer company may have more options for you, most of the most important learning still lies ahead of you. The whole point of buying a franchise is to avoid experimentation and only do what has been shown to work. New businesses are still worth a look, but be careful when you pay to be their guinea pig.

Trust in royalties

In addition to the initial franchise fees, most brands generate revenue by generating a percentage of sales from each franchisee, averaging 5% to 6%. Some benefit from selling supplies to franchisees. Others collect discounts from the required suppliers. These practices are common in franchising, although not every franchisor is involved in all of them. Ideally, you want a franchisor whose interests align with yours. That means they focus less on selling to you than on helping you sell to customers. Read their information, ask current franchisees, and ask the franchisor directly about their revenue model. Make sure they are working to make money with you, not just you.

Related: 5 Ways To Find The Most Profitable Franchises For You

Unit-level profitability

Franchisors collect a percentage of your gross sales regardless of whether you are profitable or not. The best brands still care about your financial well-being. They want you to make money, and they want it to happen in just one place. While expansion is the key to making big bucks in franchising, it shouldn't be necessary to get a good return on investment. If the concept is solid, it should translate into a respectful unit-level ROI. Ask how much data they are collecting on franchisee profits and what they are doing beyond promoting gross sales to ensure you have cash to go.

Validation calls

This is your opportunity to speak to existing franchisees. Franchisors will likely give you some names to call on. Like all references, they are likely franchisees that they know will be satisfied. Try to connect with a few others for a broader perspective. But remember, your feedback is based on your perspective and values. The way they feel about the business is not necessarily how you will feel. So avoid asking questions that provide subjective answers, such as:

Do you enjoy running the business? How stressful is it? Does the franchisor support?

The answers tell more about her than the opportunity. Instead, ask questions that reveal facts, or at least shed light on the inner workings of the brand, such as:

What is the franchisor doing to build culture? What is the company doing to support your continued success? How much money did you actually spend on the opening? Were there any expenses that you did not expect? How long did it take you to become profitable? How is your earnings compared to your expectations?

You can also ask what worked and what didn't work for them with questions like:

What are the pros and cons of your location / area? If you opened another location, what would you do again and what would you do differently? Which sales and marketing strategies have worked for you?

As with all reviews, don't rely too heavily on any source. Get as many prospects as you can.

Room for expansion

The real money in franchising is running multiple territories / locations. As much as you want to avoid mistakes, you also want to plan for success. If your first business is doing well, you will likely want to expand. With many brands you can acquire development rights so that you can open multiple locations within an agreed period of time. You may want to lock this in advance. Or maybe you want to open up a place and see how to do it. Either way, make sure there are options to grow with if you choose to.

Related: The Top 5 Franchises of 2021 from the Entrepreneur Franchise 500

Market resilience

Think about how dependent the concept is on certain conditions over which you have no control. While something as out of the ordinary as a pandemic is hard to plan for, over the course of a 10 year franchise contract it is reasonable to expect it to operate through changing economies and markets. Some franchise concepts are more prone to these changes than others. Which industries do you see? How closely are your sales tied to the economy? Are they an "essential ministry"? Do they rely on a personal experience or can customers be served remotely? No business is going to thrive in all conditions, but hopefully you can find one that can be profitable in most situations.

Whatever you choose, start your search within yourself. Make sure you understand what lifestyle you want and what is important. Nobody else can make that decision. Remember, even if you are financially successful, you will pay a price for that win. It costs you time that you will never get back. But if you choose wisely, you will improve your life while you have the time of your life.

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