Do you dream of entrepreneurship, but don’t know where to start? Are you nervous about the risks associated with starting a new business? Then, becoming a franchisee represents your best ticket.
Owning a franchise lets you be your own boss. Yet, franchises provide greater stability because of their pre-established branding and customer bases.
Studies have shown that one-year survival rates for franchises are 6.3 percent higher than other ventures. What’s more, they enjoy an eight percent higher success rate than independent businesses during the second year.
When it comes to franchise opportunities, you’ve also got plenty of choices. After all, the American franchise sector boasts more than 300 different industries, and franchises account for three percent of the national GDP.
Of course, ensuring your franchise’s success begins with knowing how to research the best companies. Let’s take a look at eight factors to keep in mind.
Franchise Opportunities 101
If you’ve spent any time researching the best franchise opportunities, then you already know that a LOT of information exists on the subject.
Why the deluge of written material? Because your business success as a franchise owner starts with finding the best opportunities based on your location, lifestyle, and interests. As a result, you need to know which questions to ask and how best to vet each opportunity.
In other words, you need to conduct a franchise review before you start investing lots of money and time in a new endeavor. Having a failsafe evaluation review process in place remains essential.
What You’ll Need to Conduct a Most Profitable Franchise Review
Ready to find the top franchises to own? Let’s dive in.
To perform the review (based on the steps outlined below), you’ll need a copy of each brand’s Franchise Disclosure Document (FDD).
How do you obtain a copy of each FDD? By contacting the franchisor directly. Some Franchise Registration States may also provide you with access to this information. Purchasing them from the franchise vendor site represents a third option.
Once you decide on the right brand for your franchise venture, don’t assume you’ve finished. The next step? Conduct a detailed evaluation utilizing the assistance of financial and legal professionals with plenty of franchising experience.
With that in mind, let’s take a look at the eight steps you should take during your initial review of various franchise opportunities.
1. Get to Know the Franchisor Management
The first step in evaluating the best franchises? Find out who’s in charge of each brand and what their experience and leadership styles look like. Besides delving into the background of key franchisor executives, have a thorough look at their support staff, too.
Do these individuals have experience in both the franchise industry AND the business sector? You’ll want to look for people who have an excellent mixture of both.
After all, investing in a franchise should come with the sharing of knowledge key to a brand’s success. Franchise leadership should provide some guidance and mentorship to help you get to the top of your game.
2. Understand Franchise Fees
One of the most significant challenges when it comes to starting a franchise is the upfront investment that’s required. Depending on the brand and other factors such as property costs and rent, you could be looking at an initial investment of $1 million or more.
That’s a massive sum on your part. So, you need to know how much is required and where it’s going.
As you research fees associated with each brand, identify whether or not the franchisor charges for other services above and beyond ad fund fees and royalties. You should also ask about all continuing fees, including licensing fees and software usage fees.
The bottom line? Make sure that the amount of the initial franchise fee, when combined with continuing fees, is comparable to other franchises of a similar nature.
Ready to start the process of securing strategic capital for a franchise? Find out more about fast loan approval of strategic capital.
3. Know Your Territory
Here’s a big one that can cause plenty of heartbreak down the road. Look for a franchise with a well-defined territory that leaves room for franchisee growth. As you research this topic, inquire as to whether or not each area is protected, open, or exclusive.
Some franchisors grant small open territories that can result in conflicts between neighboring franchisees. In such situations, competition can vary from mild to cutthroat.
Before investing in a franchise, you need to understand how competition works. You also need to know what the likelihood of dealing with that competition will look like. It’s also worth noting that potential disputes can sometimes arise with the franchisor over a territory.
Save yourself a boatload of hassles by understanding how territories work upfront.
4. Take a Closer Look at Those Financials
You should be able to look at three years’ worth of audited financial statements before deciding on a franchise. That is unless you’re considering a franchise investment with a start-up. This latter scenario comes with a bag of risk that you’ll need to weigh carefully.
As for an established brand, they should furnish you with this information. As you peruse these statements, pay attention to whether or not there’s a continuing and expanding stream of revenues from franchisee royalties.
In other words, initial franchise fees should not be driving a brand’s revenue. That is unless you’re dealing with the start-up mentioned above. Then, you’ll likely see the opposite.
Why? Because of the newness of the brand.
5. Required Rebates and Suppliers
Here’s another question to ask. Does the franchisor require franchisees to make purchases from specific vendors? If so, what’s the percentage of purchases from the franchisor to these suppliers and vendors?
You should also explore whether or not the franchisor receives any rebates from its suppliers and vendors, too. If so, how much?
Ascertaining this information might require a little digging, but it’s well worth your while. After all, when franchisors receive significant rebates from suppliers and vendors, it can erode the trust of franchisees.
6. Learn More About Intellectual Property
You’ve no doubt heard of Colonel Sanders and his clandestine Kentucky Fried Chicken recipe, right? Comprised of 11 mystery herbs, people are still attempting to unravel the magic of the brand’s famous fried chicken seasoning.
Why am I telling you this? Because the KFC recipe represents a form of intellectual property. It’s a distinguishing factor that gives the company an advantage when it comes to marketing and fostering customer loyalty.
Intellectual property encompasses proprietary, confidential trade secrets or information that distinguishes a brand’s products from the competition. It’s also part of the allure that keeps customers coming back, in the case of KFC, for more finger-licking goodness.
Of course, KFC’s not the only brand with trade secrets. It’s time to find out whether or not a brand you’re looking at has a hidden playbook or gimmick.
How can you find out? In the FDD, check out items 13 and 14. Here, you’ll find out just how unique the franchisor’s brand proves compared to the competition.
As you explore each brand’s competitive edge, take a look at how well the franchisor legally controls its brand name. Double-check whether or not there’s potential for disputes over ownership of the brand and its logos and symbols, too.
7. The Effectiveness of Franchisor Training Programs
Another consideration not to be overlooked when researching the top franchises to own? How comprehensive franchise training is.
Signs that you’re working with a winning brand include training that involves more than one teacher. Besides this, courses should address a variety of factors critical to your business’s success, including employee morale.
Another fantastic sign? Training that takes place onsite to help you garner real-world experience.
Why is this type of training so critical? Because no classroom in the world beats interacting directly with a brand’s employees and customers.
8. Instances of Franchisor Litigation
Another excellent barometer for determining the health of a franchise? Take a look at recent episodes of litigation. These should include cases already settled, as well as those that are pending.
Where possible, also explore the outcome of previous litigation. Were these outcomes positive for the brand, or do they point to deeper problems?
Has the franchisor acted to protect its brand and system? Or, are most cases of litigation between franchisees and the franchisor?
Review the types and amounts of litigation that have occurred carefully. They will point to any red flags that you need to know about before investing in a brand.
Choose But Choose Wisely
To steal a quote from Indiana Jones and the Last Crusade (1989), selecting a franchise brand is not a decision to be taken lightly. Guided by the eight criteria above, however, you’ll feel better positioned to narrow down franchise opportunities.
Once you’ve done this, it’s a matter of finding the right legal representation and financial advisors to initiate the process of moving forward.
Are you interested in funding for a franchise venture? Then, we’ve got you covered. Apply now for funding available in as little as 24 hours!
Checking for pre-approval will not affect your credit score.