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What to look for (and avoid) when shopping for a franchise opportunity

On Behalf of | Sep 27, 2021 | Franchise Law

Deciding to invest in a franchise can be an exciting time; a sense of accomplishment comes with purchasing a franchise and owning your own business.

One of the most critical steps to starting down the path as a future franchisee is learning what options are available and which one is worth your time and money. When you take the time to learn about the franchises available, you can give yourself a better chance for success as long as you know what to look for.

Here’s what you should keep in mind as you investigate franchise opportunities.

First, do your homework

Choosing a franchise should start with a substantial amount of study and legwork. Before you consider signing any agreements, you should look at several franchise options. While you are learning about a few different franchises, you should learn about what makes them successful. At the same time, you should watch for some of the red flags that could make being a franchisee difficult.

Avoid: Underfunded franchises

Similar to other areas, there are trends in the franchising industry, as well. Emerging franchise systems often do not sufficiently fund their business so they can sufficiently support their franchisees.  It is imperative to review the franchisor’s financial statements (contained in the exhibits to the Franchise Disclosure Document (FDD) to ensure that the franchisor is financially healthy and strong.

Rather than investing sufficient funds into developing the brand and the franchise, they may be utilizing the money elsewhere. While a business can spend money where it sees fit, you should question investing in the franchise when the franchisor is not willing to do the same.

In these cases, the franchise may not have the support that franchisees need to be successful. This should be a reason to proceed with caution, especially if you want to invest in your first franchise.

Additionally, if a franchisor is financially weak and unhealthy, it is very possible that the franchisor will go into bankruptcy and that always leaves franchisees in a very difficult situation in surviving.

When it is time to invest in a franchise, choosing an emerging franchise is a significantly bigger risk. While there could be many others in the same situation as you, that does not add security to your investment. Ultimately, if the entire franchise fails, you could face substantial loss.

Avoid: Inexperienced franchises

The phrase “everyone starts somewhere” is not one you want to embrace when looking at an emerging franchise that has not had time to develop its franchise model. While the core business might be successful, creating a franchise is often a completely different direction. There needs to be a proven model.

Experience is vital in the franchise industry. Through experience, a franchise has an opportunity to prove that its strategy works and demonstrate the best ways to market its products and services. Part of what you get when you purchase a franchise is the benefit of the franchisor’s experience. Their experience both in their market and as a franchise will help you be successful as a franchisee.

Look for: Lots of locations

Franchising does not follow the same rules as Monopoly. There is no rule stating that a business must have a certain number of locations before moving toward a franchise model for expansion.

However, there are several ways to demonstrate experience as a franchise. While profits and sales are significant and impressive, it is also essential for a franchise to have more than a handful of locations if it is a brick and mortar franchise.

A franchise demonstrates its success and viability by producing more of itself. These additional locations are examples that the franchise can replicate the results it has had in other sites.

Additionally, a franchisor with multiple locations will have helpful input on what to look for in a place for your franchise. While it is possible to use market data to draw a reasonable conclusion, a franchisor with expansion experience will know what makes a new location successful. They will hopefully have done demographic studies on their core customer audience and be able to utilize that information to help make their franchisees more successful.

Look for: Experience

One of the advantages of purchasing a franchise is being part of a proven model that can support clientele who recognize the brand. A business rushing into franchising before they are a proven model may not have the experience to know how to help a franchisee.

When you choose a franchise with years of experience both as a business model and as a franchise, you should have better support, demographic studies to identify core customer markets and innovations that keep the model fresh.

If the franchise is a new, emerging brand, make sure that it has already proven the model, has the infrastructure to support its franchisees and has the financial strength to continue to grow the system and the services and products that are being sold.

Look for: Established structure

A franchise can have several locations and years of experience. Still, you run the risk of operating a franchise without an established structure with only luck to guide you. When you are looking for a franchise, you should look for one that has plans for the many dimensions that make up the business, such as:

  • Sales and marketing
  • Production and inventory or the resources to provide the products and services you will offer
  • Management

These structures can help you be successful and give you options and alternatives when the business is struggling.

Putting it all together

Becoming a franchisee can should provide you with the structure to help you succeed. While these structures do not guarantee a positive outcome, they will enhance your chances.

While you are looking for a franchise, it is essential to talk to several types of people who can guide you in your decision, such as:

  • Current franchisees (especially those from the franchises you are interested in)
  • An experienced franchise attorney
  • A CPA who can help evaluate the financial strength of the franchisor and run a proforma to determine your likelihood for success

These people can use their experience to give you valuable information on what the life of a franchisee is like. They can also give you feedback about specific franchises they have worked with and what those franchises do well.

As you learn more about the opportunities different franchises have to offer, it will become easier to spot the traits that make some more successful than others. These successful franchises tend to make the job of being a franchisee simpler and less cumbersome.  If you choose a new, emerging franchise, then make sure to validate the opportunity by evaluating the franchisor’s financial strength, speaking with any franchisees that are open, determining whether the franchisor has sufficiently proven its model and having experienced franchisee counsel to review and negotiate the franchise agreement on your behalf.