9 Keys You Need to Know to Buy a Franchise Through the Eyes of an Expert
After 35 years and almost my entire business career as a franchisee and franchise executive, my knowledge of franchising qualifies me as an expert. Through my experience and expertise I feel that I’m in a unique position to provide useful tips regarding how I would evaluate a franchise opportunities.
We’ll begin by making three assumptions about my buying a franchise:
Assume that I’ve already identified a franchise opportunity that fits my personal, business and financial profile and my application has been approved.
I have obtained a copy of the Franchise Disclosure Document and confirmed that it’s current and, if required, properly registered in my home state.
I’ll use a trusted friend or advisor to provide objective advice and counsel. Often a third party who is not directly involved can offer a perspective or opinion we might not consider on our own.
Here are the 9 Keys You Need to Know to Buy a Franchise Through the Eyes of an Expert:
- Gathering as much data on the sales potential of the market/territory I’ll be operating in. I want to know as much as possible about my market, especially future potential. I’ll use every resource available including demographic data from the Census Bureau, Commerce Department, competitive information and I’ll contact local business groups such as the Chamber of Commerce. I’ll also request market information from the franchisor regarding the rationale for defining a territory. The type of response and quality of the information I receive from the franchisor can be a deciding factor in my decision to purchase the franchise.
- I’ll test the math regarding franchisee gross margin and the relationship to the royalties. My concern is that the gross margin I can earn bears an equitable relationship to the fees I’ll pay the franchisor. I don’t want to pay an 8% royalty if the gross margin percent is in the 20’s. When I do a break-even analysis this factor will come into play.
- The requirements and practice regarding an advertising fund will be of interest. Is the fund fully operational? Is there more than one ad fund? Some franchise agreements have a national fund and the requirement that a franchise participate in a local advertising cooperative. What role do the franchisees play in the administration and use of ad fund monies?
- I will have my accountant thoroughly review the franchisor’s financial statements with a focus on the source of revenue and any positive or negative trends. My interest will be to identify the source and level of capital that the franchisor has. Financial stability is important in terms of the franchisor being able to service and support its franchisees.
- When I speak with current and any terminated franchisees, I’ll want to know how long it’s taken them to reach break-even. This is in addition to other questions I’ll ask. The franchisees I speak with should represent a mix of new and longer-tenured franchisees. I will ask the franchisor the same question, recognizing I may not receive a response. I’ll use this information when constructing a break-even model.
- I’ll do a thorough review of franchise relations and litigation history (available in the Franchise Disclosure Document) by asking the franchisees if they have had a problem or issue how long it took them to get it resolved. Who did they speak with? Any litigation in the FDD would need to be explained to me by the franchisor.
- I will want to meet with the CEO or President in order to understand their role in the day-to-day operation of the franchise. What is their strategy for growing the franchise network? Do they seem to be the type of person that I could work with?
- I want to carefully review the qualifications and experience of the franchisor's staff. My primary objective is to confirm that the people I’ll rely upon have the experience and maturity to support my franchise. An important consideration will be the trainer and the training curriculum.
- If I gather the right information and answers then I’ll want to work at a franchise location for a minimum of 2-3 days in order to fully understand the role of the franchisee and what it takes to operate the business. If I have to sign a non-disclosure with the franchisor then I will.
In addition to the above I’ll perform a comprehensive due diligence before I decide to sign the agreement and write the check.
This is the approach and process I would follow if I were going to purchase a franchise. I could always add more; however, this article would quickly turn into a book.
About the Author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. He has spoken on the subject of franchising throughout the world. Ed operates FranchiseKnowHow which provides information and advice to prospective and existing franchisees and franchisors.
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