Vetting the Franchise System

Do your homework. It’s a phrase most of us had pounded into our heads from a young age. But the lesson should last long after you’ve left the classroom.

In the franchising world, homework helps separate successful entrepreneurs from bad business investors. Finding the right relationship can make all the difference. It starts with due diligence, and that means a thorough investigation of the entire franchise system. Below are five important tips on where to focus those efforts in order to make the most informed decision possible about your next franchise investment.

Ask the Experts

If you have a toothache, you probably wouldn’t just remove it yourself. Instead, you’d consult a dentist—an expert in their field—to provide you with advice on the best course of action. A franchise consultant should play the exact same role, says Rick Robinson, founder of Services4Franchising.

“The number of franchises out there is overwhelming, and the investment ranges are all over the board,” Robinson said. “It can get really confusing, really quickly to tell the difference between them. Many people think they want a certain franchise, but they have no idea how expensive it is or how to run it. An experienced franchise consultant knows what to look for to find the right match for both a franchisee and franchisor.”

Robinson, who has helped pair more than 800 franchisees with successful franchising opportunities during his 30-year career, says there is no replacement for experience.

“Experience is one of the biggest factors,” Robinson said. “I’ve worked as a franchise executive and master franchisor and I’ve seen all sorts of personalities. A franchise candidate that matches perfectly with one brand might end up clashing with another. Knowing what pairs well together is the key to franchise success.”

Consider All the Elements

There are lots of variables to consider when investigating a franchise, and often the ones that stick out as most obvious are also the most overlooked, Robinson said.

“You have to look at everything from the fit of the franchise brand and how it fits your particular set of talents to the hours and quality of life it will provide,” he said. “My goal is to match them up with a franchise that is a good fit for them. We do that by interviewing them and asking them very carefully chosen questions. Have they managed people before? If so, what was their role? Do they have experience in sales? Do they know how to market and business on their own, or do they need guidance?”

It’s rare for a franchisee to find a business that becomes the ‘perfect fit’ without some sort of professional help, Robinson said. That’s why it’s worth your time to get the full picture before ever signing on a dotted line.

“Our goal is to find a business that produces the lifestyle you want. That doesn’t always mean that it’s the sexy business you thought it would be,” Robinson said.

Pick Up the Phone

Speaking with current franchisees in the system is one of the best calls a potential franchisee can make. And, don’t just stick to the short list of names provided by the franchisor, said franchise consultant Steve Beagleman of SMB Franchise Advisors*.

“Go through the Franchise Disclosure Document and start down the list,” he said. “And, don’t go into the calls cold. Have at least five or six good questions prepared. Ask the franchisees things like whether the business has met their financial expectations, and how long did it take them to get a return on their investment? Franchisees are usually pretty honest on those calls, because they were once in the same position you are.”

“This is your chance to validate the claims you’ve heard,” agreed Robinson. “Franchisees can answer almost anything they want. Franchisors can be forced to hold back on things like profit and income because of federal laws. Questions I always advise potential franchisees to ask include: how did they get launched properly? What did they do right and wrong? And, is there anything they would do differently?”

Get the Lowdown on Marketing

There’s a simple goal to aim for once you do sign on the dotted line, Robinson says: break even as quickly as possible, then start earning money. Often the best way to do that is to build buzz around the brand and your contribution to it.

“That’s another important thing to ask existing franchisees and franchisors as you’re doing your due diligence,” Robinson said. “What are the advertising and marketing programs available to me to help drive business to my franchise? What does the franchisor do to help bring in business to me? And, as importantly, what tools does a franchisor provide for me to use to help bring me clients?”

A robust marketing program can mean the difference between quick success for a new franchisee and years of toiling to turn a profit.

Go Deep Into the FDD

Robinson’s last tip may be the most crucial: an in-depth review of the Franchise Disclosure Document. It’s not an optional step, he stressed.

“This is one of the most important things you should do as a potential franchisee, because the FDD lays out all the details of what you’re purchasing,” he said. “Pay special attention to things like length of contract, territory definitions, and investment items that tell you what the total investment is going to be. Make sure to include things like royalty and franchisee fees into the equation.”