10 Key Things to Consider When Evaluating a Franchise Opportunity

If you're interested in running your own business, why not consider buying a franchise opportunity? A franchise is a proven business system that has been market tested, and has systems in place that allow its franchisees to own and operate under that proven system and brand.

There are guidelines in place to ensure that every owner is adhering to those same business practices. Consumers and clients want and expect consistency, one of the key factors why franchise systems succeed.

Let’s examine some other considerations if you're thinking of investing in a franchise opportunity.

What to consider when evaluating a franchise opportunity

1. The market

Has a defined market been determined? Is that market in growth mode or is it in decline? Understanding with complete certainty who you will serve helps to determine the viability and ultimately the profitability of the franchise.

2. Company history

Researching the officers and management of the franchise along with those who will be supporting your business should provide you with some insight on the franchise's culture. Look for stability and experience, as franchising is competitive and you want the best team as your partner.

All franchises will file a Franchise Disclosure Document (FDD) with their complete business details so you can begin your research. Be aware that the FDD is not forwarded until you have moved along in the discovery process and the franchisor has determined you are a qualified and serious candidate. Articles 1-4 of the FDD will give you the company's history, a list of the management team, litigations, and bankruptcy information.

3. Financial statements

Article 21 of the FDD contains the franchise's financial statements. Review them, question them, and consider having a CPA look them over.

4. Level of investment

You have to begin with a personal inventory of how much you can comfortable invest. All franchise companies will look at your liquid capital (sometimes known as the capital required) your assets-to-liabilities, and your net worth. You don't want to come in undercapitalized. Be honest with yourself about what you can invest.

5. Training and support

Look for a support and training system that is comprehensive and does not have any outdated procedures. Speak with current franchise owners in the system and learn from their experience. These owners are a valuable resource and can tell you whether the franchisor actually provides all that they promise.

More articles from AllBusiness.com:

• What Is the Franchise Disclosure Document?
• Franchising 101: The Basic Terms, Tips, and Facts You Need to Get Started
• Tips for Picking the Perfect Name for Your New Corporation
• The New Franchisor’s Checklist for Franchising a Business

6. Territory

This is covered in Article 12 of the FDD. Depending on your industry and business, look for what’s trending in your territory. Is that territory experiencing growth or decline? Make a visit to City Hall and speak with someone in planning or zoning. The franchisor will want you to be successful in your location; otherwise, everyone loses.

7. Royalties

Go over Article 6 of the FDD very carefully. The franchisor should be making money on its royalties, not by providing owners with “other” services. Many of these other services are to third-party vendors and constitute a pass-along expense. A number of franchisors will reward their owners with a sliding royalty scale based on revenue: the more you earn, the less royalty you will pay. Also, look at minimum royalty payments and see if they’re enforced.

8. Restrictions

Information regarding any restrictions can be found in Article 8. Franchisors have restrictions in order to protect brand identity and consistency across the franchise system. Make sure you understand of what you can and cannot do as a franchisee.

9. Suitability

A franchise agreement lasts generally anywhere from five to 15 years. It can be very expensive to back out once you have signed your agreement. Suitability encompasses a personal inventory of your core strengths and skills, and whether or not you will fit with the franchise culture you will be partnering with. Do you see yourself doing this job for a long time?

10. Exit strategy

Think two steps ahead. What if you get ill or have a personal crisis? Plan on how you would exit, whether that would be selling or transferring the business. Keep in mind there are costs to both so ask about those costs upfront.

FAQs about evaluating franchises

Below we have summarized the most important questions and answers on the subject.

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