Buying a franchise may be the biggest purchase a person makes in their life. Besides buying a home, franchisees often invest on average $50,000 to $200,000 just to get started. This is exactly why it is important to do extensive research to make sure you are making the right decision for your wallet, life and your success.
Here are eight crucial steps to follow to ensure that the franchise you choose to invest in is the right one.
Learn Franchising 101
If you are not already well-versed on how the franchise business model works, it’s worth taking the time to learn more about the industry in general. Paul Pickett, Vice President of Franchise Development at Wild Birds Unlimited, recommends starting with Franchising for Dummies by Michael Seid. That’s because in order to pick the right investment opportunity, you’ll need to learn the basics.
John Armstrong, a consultant for FranNet, agrees.
“For general information, the International Franchise Association is a great place to start. At FranNet, we do a lot of Franchise 101 and Careers in Franchise Ownership seminars and webinars to help educate people,” Armstrong added.
Check out the brand’s franchise website
Once you have found a brand you are interested in, it is important to take advantage of the free information the brand provides to learn as much as you. A franchise development website should provide a significant amount of content to help you make your decision.
“If the brand is transparent in the beginning, then they will be transparent throughout the entire process. At Wild Birds Unlimited, we provide our full process with a checklist for the public to see,” said Pickett.
Connect with current franchisees
Anyone who is currently running the business you are interested in should be able to tell you what it is really like on a daily basis. Whether you give the franchisees a call or go out to dinner with them, tapping into the existing knowledge of current owners can offer valuable insight into what running your business will look like and set realistic expectations before signing on the dotted line.
“A potential franchisee should speak with eight to 12 franchisees--enough where the calls start to get repetitive. These calls should be an hour or more and can be with both active franchisees and those who left the system in the last three years. If they can visit an existing franchise and the location, that is ideal to see if they can visualize themselves in the business,” said Armstrong.
Review the Franchise Disclosure Document
The FDD is a legal document that the FTC requires franchisors to provide to franchisees at least 14 days prior to a sale. While every item should be read and understood, Item 19 will provide you with financial performance representations, which may be one of the most important pieces to look at when considering your investment.
Be honest with yourself
With such a large purchase on the line, it’s important to ask yourself the right questions. Is this a concept you’re passionate about? And does it play into your own strengths? What are you good at and what will you need to delegate to others? If you don’t answer these questions honestly, you probably won’t make the right decision.
“It’s rare that we have anyone in our system who doesn’t love our brand and our concept. Being aware of what you want and understanding your passion is an important step to take in the process,” said Pickett.
Look at the Franchise Business Review survey for the brand
Franchise Business Review brings transparency to the franchise industry by providing a forum for franchisees to rate their satisfactions with the brand.
"If a brand isn’t using that resource, or something like it, to understand how existing franchisees are answering the questions, then you need to ask the franchisor those questions yourself," said Pickett.
Learn and understand the financials
If you don’t know the basics, you won’t succeed--even with someone else’s business model. It is key that you know your way around a Profit and Loss statement and a cash flow statement. Besides knowing the basics, you should build a financial model and work with a CPA to validate the success of your proposed model.
“I always suggest a client send their built financial model to a few franchisees in the system that they are looking at. Franchisees in the business can provide the best feedback on the model,” said Armstrong.
Hire a franchise attorney to review legal documents
Both Armstrong and Pickett suggest hiring an attorney that specializes in franchising as a part of the final steps in the process.
At the end of the day, there is never a 100 percent guarantee for franchise success and you should be prepared to deal with both success and failure with your business. But by following these eight important steps, you’re arming yourself with all of the information you need to ensure that the odds are in your favor as you get your new business up and running.