Choosing a franchise company is a huge decision.
After all, choosing the wrong company can lead to a lot of financial heartache—and that's putting it lightly!
As a franchise consultant, I know how important it is to help my clients make the right decision. That's why I conduct detailed analyses of franchise companies under consideration, and why I make sure my clients understand all of the factors that go into making the best choice for them.
And so, this week, I wanted to break down some of the most important things you need to know about any franchise company before you take the plunge. Here are some questions you should ask before selecting a franchise company:
1. What is the initial and total investment? You want the franchise company to clearly identify what you will be required to pay upfront (the franchise fee) and to clearly articulate the expected total investment in their Franchise Disclosure Document (FDD). It’s very important that you carefully review this document, as it discloses the range of your possible investment in this opportunity.
2. How long has the company been selling franchises? This question is important to a lot of candidates and addresses your tolerance for risk. On one hand, some candidates want a more established brand with a clear track record. If the company is an emerging brand, there may not be enough data points for the candidate to be comfortable. On the other hand, some candidates are comfortable with emerging brands—just like early adopters are the first to try new technology and get in on the ground floor. A new company creates an opportunity this type of investor can’t pass up. You have to decide what level of establishment—and what level of risk—is right for you.
3. How many units has the company sold and opened? More units open is better, traditionally, but not always. I have heard of stories about how franchise companies have grown too fast. If we can get an understanding of the financial strength of the franchise company or the strength of the private equity group, then we can feel comfortable that rapid growth can be supported and that the support continues post-opening for all franchise owners in that system.
4. Does the franchise company have many multi-unit owners? Think of this like the stock market: Investors own varying amounts of Apple stock, for instance, and larger investments provide encouragement that there are people willing to take big risks with that company. This applies to franchising, too. Multi-unit ownership provides a level of comfort for the single-unit investor. When franchise companies have development schedules in their contract, this gives a multi-unit owner time to get the first one going before they move on to the second, third, etc. Buying a larger territory that supports more than one unit also secures that larger territory for the franchise owner.
5. Does the franchise company have an established and refined discovery process? Is there a process for engaging with potential franchise buyers? Do they allow the potential buyers to fully understand what they are getting into regarding corporate culture, economic standing, and long-term vision? The parent company must disclose the names and contact information for current and past franchise owners in its Franchise Disclosure Document (FDD), and it is important to talk with them.
6. Would you place a family member into that franchise? This is a good test to identify your level of comfort and knowledge of the franchise you are considering.
I realize that was a lot of information. That's because choosing a franchise company to invest in is an important decision—and one I don't take lightly.
These are the same factors I take into account when I choose what franchises to show to my clients. When I combine this information with my clients' needs, wants, and preferences, I can help them select the best possible franchise for them.
Rick Morgin is a Consultant with The Franchise Consulting Company and alumnus of Santa Clara University. We assist clients with the educational process of researching and selecting available franchise businesses that best suit desired lifestyles and financial goals. The research, qualification, and application service we provide is free; our fees are paid by the Franchise company when a client opens their business. For more information please email rick@thefranchiseconsultingcompany.com, call/text at 925-324-6371 or visit www.franchisematchmakerserver.com
