By Lori Kiser-Block, CFE
President, FranChoice, Inc.
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If you were going to place a bet at a horse race, the first thing you’d do is look at the daily racing form to see a horse’s pedigree, how he has performed in previous races and other significant events to help you in the prediction of its performance in the current race. A second way to get information about a horse is to know a tipster, someone on the “inside” of horse racing who knows things about the horse, its owner and the jockey not made public.
When handicapping a horse race, your safest bet is to watch the tote board and pick a horse with great odds to win. But can you do the same when researching a franchise business? After all, the whole point of business ownership is to be in the money, so to speak. You want to be sure that the franchise you are considering is a good all around opportunity and will offer you the best chance for success.
The following checklist is subjective, but it’s based on many years of insider experience. If you want to know that you’re looking at a solid franchise opportunity, make sure to check the following factors carefully:
1. The attitude of the existing franchisees. This is the most important indicator of a franchise company. In a solid franchise business, an overwhelming majority of the franchisees are happy. They are satisfied with the training and assistance programs, the marketing efforts, the financial results they are achieving, and the relationship they have with the people in the company.
2. Responsiveness during the investigation process. Are you treated as a VIP and are all your questions being answered promptly? You want to see a professional and responsive reaction to your research into the franchise. This is the “courtship” phase of the relationship and it doesn’t bode well for your future as a franchisee if you experience frustration and delays in getting information.
3. Litigation history. Though it is common for a franchise company, especially if they have a number of years of history with lots of franchisees, to have some litigation history, any more than a few of instances should be a red flag. Carefully examine the litigation disclosures in the Franchise Disclosure Document (FDD) to determine clues about how the franchise company deals with conflict. If there is a pattern of litigation, steer clear.
4. Direct operational training. You need to make sure that the training programs of the franchisor cover all of the operational knowledge you’ll need to deliver the product or service of the business if you become a franchisee. In addition to reviewing the information the franchisor provides about their training programs, make sure to ask the existing franchisees how well they were actually prepared to conduct the business based on the training they received.
5. Other training. In addition to direct operational training, you will need to learn many general things about running any business. Employee and payroll issues, theft protection, and the form of corporate entity you will use are just a few examples of the types of subjects you will also want to make sure are covered in training so that you are completely prepared to run your new business.
6. Marketing programs. You need to make sure that the marketing programs of the franchise system get the job done in terms of building and maintaining a sufficient customer base to support the business. This is another very important area where you’ll want confirmation from existing franchisees in addition to reviewing information from the franchise company.
7. Real estate and construction assistance. Many franchises require that a location be selected and built out according to specifications from the franchisor. Since most franchisees have little or no experience finding good locations, negotiating leases or purchase agreements, designing layouts, supervising general contractors, or anything else associated with this process, you need to make sure such assistance is available from the franchise company.
8. Financial assistance. Many franchisees need to finance part of their investment in the franchise business. Though it is quite rare for a franchise company to provide financing directly, a solid franchisor will have “paved the way” for the franchisees. This might be in the form of standardized business plan templates made available for the franchisee or even vendor relationships with prospective lenders that are set up in advance for franchisees.
9. Financial strength of the franchise company. It sounds simple but a solid franchise company has a strong and profitable financial status. Make sure you examine the audited financial statements in the FDD (or have them reviewed by an accountant if you’re not experienced in this area) to make sure the company is likely to stay in business and meet its commitments to the franchisees.
10. Financial strength of the unit operations. A good franchise company has an opportunity available that allows a typical franchisee in their system to earn a reasonable return from their unit operations within a reasonable period of time. Though this is sometimes difficult or challenging to confirm, it is an essential component of finding a solid franchise company. Spend whatever amount of time and effort is necessary to confirm the unit economics before becoming a franchisee of any company. You may find earnings claims in the company’s FDD but the best source of this information is from existing franchisees so be sure to cover this subject when you make your calls.
Finding that winning franchise takes a combination of hard research and gut instincts. But if the franchise you are investigating scores well on each of these ten indicators, you have indeed found a potential in the money franchise. Assuming that the opportunity and the franchisee role characteristics fit with what you are looking for, you should be able to achieve success as a franchisee with such a company. Ladies and Gentlemen, place your bets!
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Lori Kiser-Block is President of FranChoice, a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.
