5 Steps to Getting Started in Finding the Right Franchise
When considering any new investment, you (should) have a million questions, and getting started in franchising is no exception. Your mind will be racing: What's the best franchise industry? What's the best business model? What are the start-up costs? How do I finance the investment? How much money can this franchise make? Will I have to manage people or can I be an absentee owner?
The Steps to Choosing a Franchise
These are all fair and important questions to explore, and you'll certainly want to follow a Step-by-step plan to buying a franchise.But you can't run a race if you can't find the starting line, and the path to addressing all of these questions begins with the most fundamental question of all: How do I get started choosing the right franchise? The good news is that if you've done some initial research and believe that franchising could be the right approach for achieving your financial and personal goals, there are some proven steps you can follow to ensure you make an informed and intelligent decision.
Here are 5 steps to get you started off on the right foot:
- Step 1: Set Your Priorities for Buying a Franchise
- Step 2: Explore Your Options at a Franchise Show
- Step 3: Dig into the Key Details
- Step 4: Speak with Current and Former Franchisees
- Step 5: Conduct On-Site Due Diligence on the Franchise Opportunity
Let's go through these steps in some more detail...
Buying a Franchise Step 1: Set Your Priorities in Order to Narrow Your Focus
One of the very first things you need to do as a prospective franchise buyer is to form a list of your top priorities. The list doesn't have to be complete or final (chances are it will change at least somewhat as you learn more about the range of franchise opportunities available to you), but it should capture your top must-haves that will guide your initial franchise search. Your priority list will cover things like:
- The type of business you'd like to be in (from general preferences like "I'd prefer to work with consumers" or "I'd like to be in a business to business franchise" to more specific criteria like "I want to invest in a pizza franchise" or "I want to get into a business consulting franchise")
- Whether you are looking for a large, established industry (e.g., general fast food) or a smaller but faster-growing space (e.g., healthy and organic food franchises)
- Whether you are looking for a large, established brand (e.g., Subway, SERVPRO, or Chick-fil-A), or a rapidly growing, up-and-coming concept (e.g., groOrganic or MiniLuxe)
- How much training and ongoing support you'd like or expect to receive from your franchisor
- Where you'd like to operate your franchise (most franchises only target certain states for expansion in a given year)
- How much you can afford (or plan) to invest
- ...and so on
These are just a few common examples -- there could be any number of different items that you would consider your top priorities because they reflect what's most important to you, which is what conducting a personalized franchise search is all about.
Once you've pulled your priority list together, you'll want to use that list as a filter to get an initial sense for the industries and individual franchises that could match your top priorities. This will help you narrow your area of research from thousands of franchise opportunities to perhaps a few dozen. To work through this process, you can browse franchises by industry or use the Franchise Selector Tool (which lets you filter by industry, location, or preferred investment level) on the FranchiseHelp.com homepage to quickly search through and filter down your options. Spend some time with these tools - they'll help you to answer your initial questions and narrow your focus to a "hit list" of the dozen or two companies that best meet your priorities. Those are the franchises you'll be exploring further.
Buying a Franchise Step 2: Explore Your Options at a Franchise Show
Once you've assembled your initial "franchise hit list" to explore further, it's time to ask some questions. Going through a detailed Q&A with several dozen franchises can be time consuming and impractical -- you can't fly to every franchise's HQ to meet with their corporate staff -- so you need a way to meet with as many franchise representatives as possible in a short window of time. Attending one or more franchise shows or franchise expos is a great way to accomplish this task (you can search through our franchise shows list to find one coming to your area). Most franchise shows will feature anywhere from a few dozen to several hundred franchises gathered in a convention hall, with hundreds or even thousands of individuals just like you going from booth to booth to learn more about companies that pique their interest: think of these events as speed dating for the potential franchise owner! You won't learn everything there is to know about an interesting franchise at a franchise show, but you will learn enough to cross opportunities off of your list that don't truly meet your criteria.
When attending a franchise show, always keep two things in mind:
- First, make sure you are dealing with a true franchise (as opposed to a business opportunity or "biz opp"). A real franchise has to file a franchise disclosure document (FDD) / uniform franchise offering circular (UFOC), which is an FTC (Federal Trade Commission) mandated document that is supposed to be filed yearly and which explains, in detail, the terms of the franchise opportunity. If the system doesn’t have an FDD filed in the state you’re looking to operate in and they didn’t receive a special exemption from that state permitting them to skip the filing requirement, it’s unlikely you’re dealing with a bona fide franchise.
- Second, don’t just walk around the franchise convention floor collecting brochures, swag bags, and pamphlets! You should show up with a list of the companies you’re most interested in exploring and should make a point to engage them in discussion. But how do you know which questions to ask? Take out the list of priorities that you created back in Step 1 (setting priorities) and start asking the representatives of the franchises you speak with whether their opportunity satisfies your most important criteria.
For a more detailed discussion of how to make the most out of the franchise show experience, you’ll want to read through our tips for attending a franchise show -- a handy, printable guide that goes into greater detail about the franchise show experience.
Buying a Franchise Step 3: Dig into the Details
After reviewing the profiles of franchises of interest online and speaking with their representatives at a franchise show, you should have cut down your list of potential franchise opportunities to perhaps a half dozen or so. This is when it's time to get down to the details! Get your hands on a copy of the FDD / UFOC of the franchises you're most seriously considering. The Franchise Disclosure Document / Uniform Franchise Offering Circular breaks down the details of the franchise offer, from a description of the business, to a breakdown of the expected costs of investing and running a location, to a discussion of the franchise's key executives, to a list of any ongoing litigation that may raise red flags for you as a prospective investor in a franchise, among many other crucial details.
With FDDs in hand, you can begin to:
- Compare expected start-up costs, ongoing expenses, and potential revenues of the franchises you're considering
- Understand the amount and style of initial training and ongoing support that will be offered
- Review various franchises' rates of expansion
- Compile a list of current and former franchisees (so you can ask them the really tough questions) of your target franchises (as well as similar lists for one or two of their closest competitors)
Estimating potential sales, cash flow, and profit for a franchise is a key element in choosing a profit- making franchise. This job isn't always as easy as it should be. Neither the Federal Trade Commission (FTC) nor any of the states require a franchisor to break down the performance of each individual franchisee in their system. However, franchisors are allowed to provide a voluntary written "earnings claim" or "financial performance representation" (otherwise known as Item 19 in the FDD) in their disclosure document. Roughly 1/3 of franchisors currently choose to make this voluntary disclosure of financial performance. The good news is that competitive pressures will certainly continue to increase the number of franchisors that include earnings claims, since savvy investors know that it is often a good sign if a franchisor is willing to share earnings claim figures. Make sure to take down notes on what you find - you'll be asking questions about it later.
One of the benefits of buying into a franchise system is the training and ongoing support that the franchisor should offer. The FDD will detail for you both the type and duration of training as well as more subtle information like the length of the franchise operating manual (which should detail the franchise's "secret sauce" business process step-by-step, like you would outline the steps to assembling a new entertainment center). Take note of what you find - you'll be asking investors in the system to give you their own take of what the franchise claims in their disclosure document.
Review the "List of Outlets and Franchisee Information" (Item 20 of the FDD) to find the tables that outline the total number of franchise unit openings and closings. These tables will list the actual franchise outlets at the start of the year, the total number at the end of the year, the number that were sold or transferred, and the number that were terminated. The franchisor should disclose this data going back several years. With these basic figures you can easily determine how fast a franchise is expanding (or if they are actually contracting by closing more locations than they open in a given year). While the fastest-growing franchises aren't necessarily the best franchises (maybe they're not selective enough in awarding franchise licenses?), it's important to understand the trends among the franchises you're considering. Jot down any interesting data points or impressions you get from reading this FDD section for the franchises you're considering as well as their closest competitors.
While you're reviewing the FDD Item 20, make sure you also find and print out the list of current and former franchisees. This alone is an unbelievably rich resource -- you can actually find the name, address, and contact information (often a phone number or email address) of people who are actually currently invested in the franchise system you're considering (as well as the information of those who recently left the system or had their license terminated). From these tables you'll want to create a list of the names and addresses of franchisees who are close to you. You'll also want to create a separate list of current and former franchisees who are too far for you to visit. Finally, repeat this process for at least one of your target franchise's closest competitors. You'll be comparing answers from all these sources.
Buying a Franchise Step 4: Speak with Current and Former Franchisees
No amount of research can supplant the need to speak with current and former investors of a franchise for yourself. Taking the questions you developed from reviewing the FDDs -- questions about the business, questions about training and ongoing support, questions about the Item 19 (earnings claims) statements, questions about the expansion (or contraction) of the system -- and get them all in front of you in one place.
Now it's time to ask some tough questions of the world's experts -- the current and former franchisees themselves! Start emailing or calling the individuals found in the list of current and former franchisees you compiled in Step 3.
This is a critical piece of the due diligence puzzle, but for many prospective franchisees, it can be an intimidating step. After all, current (and former) franchisees must be very busy people, right?
This is true, but don't forget that current and former franchisees were once in your exact same position; if approached correctly, most would be happy to offer their opinions and advice.
So, how can you approach a current or former franchisee (in person, by phone, or by email, in decreasing order of preference) in such a way that they will be willing (even enthusiastic) to speak with you?
- First, let them know who you are and that you are seriously considering joining the franchise system they are now (or recently were) a part of;
- Second, let them know where you found their information (most likely the Franchise Disclosure Document);
- Third, make it clear that you've already done substantial research on the franchise industry and their particular franchise system (nobody wants to waste time speaking with someone who isn't serious enough to do their own homework);
- Finally, ask if they would be wiling to speak with you for 15-20 minutes in order to share their expertise and address a few lingering questions that will help you to make a truly informed decision.
At this point, the vast majority of franchisees will say that they would be happy to speak with you, and you should feel free to go through your Q&A list with them. This is your golden opportunity, so feel free to go into details like:
- "Are you making as much money as you had anticipated and how long did it take your unit to become profitable (if it is)?"
- "Are you happy with the training and support provided by the franchisor?"
- "What kind of hours were you working in your first year in the business? In the second year?"
- "What do you know now that you wish you knew before you invested?"
- "What other franchises were you considering and why did you choose this franchise over the others?"
These questions may seem basic, but through the answers you receive you'll gain quite a bit of insight.
When speaking with franchisees, try to determine, as best you can, why some were more successful than others. Ask yourself: Is the franchisee taking full advantage of the system? Is the franchisee putting in the requisite time and effort to be successful? Perhaps the owner is absentee and not very involved. Perhaps the owner doesn't quite follow the franchise system's process. If you speak with a former (or current disgruntled) franchisee, try to ascertain if there were problems with the system or if the problems were caused by the specific franchisee.
Buying a Franchise Step 5: Visit Franchise Locations (and Competitors)
Even if you discover a great concept with seemingly happy franchisees, to get a really good understanding of what to expect you'll want to visit active franchise locations or meet face-to-face with several current franchisees. Again, working with the list of franchise outlets that you compiled from the FDD in Step 3, you should map out a dozen or so people whose locations you can visit and / or with whom you can meet face to face. Remember not to limit yourself to just talking to franchisees directly related to your own franchise of interest - you'll want to speak with competitors as well. The more variety you get, the better information you'll have.
Buying a Franchise Bonus Step 6: Accept That You Can't Know Everything
The most important thing a potential franchisee can do to ensure success is to know everything they possibly can about the company they're getting involved with before investing, but it's unrealistic to expect that you could ever know everything. What you can do is take the right steps to make sure that you know the most important things (and that alone will require quite an effort). It may require months of research -- from reviewing opportunities online to attending a franchise show to speaking with current and former franchisees -- before you are ready to select and invest in your own franchise. There's no question it's a lot of work, but if you proceed diligently and intelligently through the steps outlined above, you'll have started down the right path to a decision that could pay back your efforts for years to come.
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Strategic and Structural Alternatives to Franchising
These are difficult decisions. The solutions are not clear cut from a business or from a legal perspective. It is critical that a company in this position work with qualified counsel to identify an alternative that will have a reasonable basis for an exemption and still make sense from a strategic perspective. The balance of this chapter will look at the many alternatives currently being tested by many U.S. and oversees companies. As you can see, the lines of demarcation are not always clear. The differences between many of these alternatives may in fact be in name only. Some of these concepts are truly innovative and have not been truly tested by the courts or the regulators. In these borderline cases, a regulatory “no-action” letter procedure is strongly recommended. Other concepts are not very innovative at all and merely borrow from long-recognized and analogous legal relationships such as chapter affiliation agreements in the non-profit arena or network affiliation agreements in radio and television broadcasting.
Determining Your Priorities
At its core the decision to open a franchise isn’t a trivial decision. You are making a serious investment, but if you take all of the factors into account it can be an amazing one. But before you get there you need to sit down, analyze your needs, capabilities and limitations in relation to a franchise business. This could take a few days to consider or a few weeks or months. In either case, it is one of the most important steps in the franchising process, so don’t skip it.