What To Look for When Evaluating Franchise Investment Opportunities

The cost to become a franchise owner is no small investment. That’s why it’s of absolute importance to make smart choices that will net you the best possible returns.

Of course, there are franchises on both ends of the cost spectrum. For example, brands that don’t require brick-and-mortar stores, such as Dream Vacations, Jazzercise and Amazing Athletes, are examples of franchises that tend to be more affordable than big names like McDonald’s or Subway. Regardless, they will still require you to spend a significant amount of your hard-earned cash with the ultimate hope of turning a profit.

So, what exactly should you be looking for in a franchise investment opportunity?

Factors to Consider

If you intend on investing your savings into a franchise then you should also be dedicating time to research the brand, its history, its reputation, its financial health, as well as its support systems, market demand and competition. When looking at what makes a good investment opportunity, it comes down to more than just numbers.

These additional factors should be considered when evaluating franchise opportunities:

• Steady Growth

Steady growth can be an indicator of a franchise’s potential success. When a franchise is expanding strategically and at a sustainable pace across various markets, that would imply that the brand has a well-thought-out business model and could translate to a more profitable experience. However, there is such a thing as growing too fast. As Darrell Johnson and Luis Despradel of FRANdata reported, brands that expand too quickly may open themselves up to failure.

“We’ve proven there is a clear correlation between more aggressive growth and accelerating adverse consequences,” the pair wrote on Franchising.com. “Expand too rapidly and suffer the negative consequences of closed units. These include a negative impact on public perception and franchisee culture, significant franchisor management distraction, and lower financial results.”

• Recession Proof

Economic uncertainty is an unfortunate reality that should also be considered when evaluating franchise opportunities. A helpful tip when examining your options is to look at franchises that exist in industries that are resilient even when the economy seems to be at its worst. Industries such as health care, senior care, automotive and postal services are all examples of categories that have proven to be recession-resistant because they provide essential services even through tough economic conditions.

• Financial Stability

A franchise’s financial stability is another crucial piece of information you should consider when evaluating different opportunities. You can find all the information related to a brand’s financial health by studying its franchise disclosure document (FDD), which will provide you with a look at a brand’s financial performance, including revenue, profitability and expenses.

The FDD is a vital resource that should be closely examined before you make any decisions. You can also use it to compare the brand to industry benchmarks and competitors, which can help you better understand how the franchise fares in its specific sector and whether it is a financially sound investment.

“Financial stability of the franchisor is essential when considering a franchise purchase,” wrote franchise and business attorney Rush Nigut. “Financial due diligence is invaluable during the selection process and must take into account profitability, cash flow, debt load [and] liquidity amongst other financial metrics. Purchasing a franchise with an unstable franchisor can lead to difficulties and ultimately negative consequences for your business.”

• Franchise Fees and Costs

An often-overlooked aspect of a franchise investment is the ongoing fees that come with it. The majority of franchises require an initial investment, which encompasses a wide range of expenses that are necessary to get your franchise up and running, including the franchise fee, equipment, real estate and leasehold improvements, inventory, and marketing. 

But those fees are just one piece of the puzzle. There are also recurring costs associated with franchises, including ongoing royalty and marketing fees. These fees will be available in the FDD, and you should familiarize yourself with them so you can get a better understanding of just how much you’ll be making and paying the franchisor.

Proceed with Caution

As noted, venturing into the world of franchise ownership requires a significant financial commitment and careful consideration, thorough research, and a keen eye for detail. There’s more to it than just dollars and cents when your hard-earned capital is at stake. Be sure to look for franchises that align with your own professional goals and budget. By keeping the aforementioned tips in mind, you’ll save yourself from making any costly mistakes down the line.

These are just some factors you should consider when evaluating potential franchise investment opportunities. If you’re looking for high-value, low-cost franchises, we’ve compiled a list here.