HOW TO CHOOSE THE BEST FRANCHISE
Franchising continues to be an attractive business model in the U.S. and around the world. In fact, according to a report prepared for the International Franchise Association (IFA) by IHS Economics, titled “Franchise Business Economic Outlook for 2015,” there are over 780,000 franchise business establishments in the U.S., representing a 1.6 per cent increase from 2014.
Franchising is having a significant impact on the overall economy and job sector, so it’s no wonder that aspiring business owners are attracted to it. But with so many options, the number one question that potential franchisees ask is, how do you choose the best franchise to invest in? How do you decide on the one that’s going to be right for you? In this guide, we’ll examine ways to make sure the franchise you choose is actually the best choice.
Before we get into the details, let’s look at some facts LocalVox collected about franchising:
» One out of every 12 businesses in the U.S. is a franchise
» Each workday, a new franchise opens every eight minutes
» Half of all retail sales come from franchise businesses
» Three percent of the total economy comes from the franchise industry
» There are 8.8 million jobs directly related to the franchise industry, with 247,000 being added in 2015
These are some impressive statistics which make franchising seem even more enticing as a business model. However, finding the right opportunity can be overwhelming. Every franchise owner has had to go through a thorough decision-making process at the beginning of their journey, asking themselves tough questions and spending long hours researching, attending franchise opportunity expos, and evaluating different opportunities. That’s exactly what you need to do, too, if you’re considering entering the world of franchise ownership.
Franchising or Entrepreneurship?
To clarify, franchising is not the exact same thing as being an entrepreneur. If you truly have the entrepreneurial spirit, you may not be happy as a franchise owner. The franchisee-entrepreneur debate is one that is often hotly contested, but the reality is, each of these ways of doing business requires a different mindset. Entrepreneurs and franchisees are both risk takers, but franchisees have to be able to put their faith in someone else’s system rather than in one that they create. Much of the risk they assume is taken on during the decision phase, when they decide to buy into a franchise business that someone else has created. Franchisees support someone else’s vision and dream — that of the creator of the franchise, the original entrepreneur. On the other hand, entrepreneurs carve their own path and assume risk at every point in their venture. They create the systems that others will follow and can change things without approval or warning.
Let’s look at some of the questions you need to ask yourself in order to determine whether franchising is right for you, and if it is, which franchise business is the best one for you to invest in.
Personal and Financial Inventory
When you first got the idea of becoming a franchise owner, you may have reached that conclusion because of a particular franchise brand you had in mind. Maybe you’re a regular customer at a particular franchise, and have always had a positive experience. Maybe you’ve envisioned yourself as part of a specific company. Perhaps you’ve attended a franchise opportunity expo, and hit it off with a sales representative at their fancy display booth. Regardless, before you commit to owning a franchise business, you need to analyze all angles of an opportunity and ask yourself some important questions to find the right fit. There are thousands of options available at all different levels of investment (time and money) and to suit all interests. Finding the right one can take months, but it is time well spent. At the end of that process, you may happily find yourself part of a franchise organization that you never before considered.
Start taking a personal and financial inventory by asking yourself the following dozen questions:
- What are your interests? Ideally, you want to look for a franchise business with practices and values that line up with things in which you are interested.
- What past jobs or volunteer positions have you enjoyed the most? What specific aspects of those positions did you like best? What aspects did you like least? Be very specific in your answers, as they can be markers to watch for when making your final choice.
- What are you good at? Will you be comfortable cold calling? In a retail environment? In management? Being out in the field?
- What are you looking for in a business?
- How do you imagine spending your days?
- What are your goals in regard to starting a franchise business? Are you looking for long-term wealth, a legacy, or just a change from the corporate world? A new challenge? A side business? Would you like to become a multi-unit owner?
- How much are you willing and able to commit to and invest in the new business? To answer this, take a holistic approach and consider all fees and expenses, including the initial franchise fee, ongoing royalties, equipment, startup costs, inventory, marketing, location, remodeling, training, employees, insurance, and so on. Will you have enough in savings to sustain yourself for several months while your business gets underway (to cover your living expenses)?
- How much money can you afford to lose? While this may seem like a pessimistic question, it’s a realistic one that can greatly impact your decision.
- What sort of business will help you build the lifestyle that you’ve always dreamed of?
- Can you operate within boundaries that someone else has established? If you’re more likely to “go rogue,” then franchising might not be the best option for you.
- Are you comfortable doing the work a particular franchise business requires, and will you be comfortable telling others about it? Not all businesses are glamorous, so you need to make sure you’ll be proud to tell others what you’re doing and promote yourself and your business at every opportunity.
- Is a certain industry recession-proof? Once you start to narrow down your options, examine the industries they’re in to gauge whether they are recession-proof, meaning, will they do well no matter what is happening with the economy, or are they more likely to be influenced by economic fluctuations?
Refine Your Options
By the time you’ve gone through all of these questions, you’ll likely have a lot of notes, but you’ll probably also have a better idea of what you want and need in a franchise business. With this inventory complete, you are now able to start narrowing down your choices. Start by focusing on categories first, rather than specific brand names. You may gravitate to a certain brand because of its name recognition, but it may not be the right choice for you. Just because it’s a big name does not mean it will be profitable, either. In a recent investigation by the Wall Street Journal, it was found that franchisees of some of the biggest brands (Quiznos, Cold Stone Creamery) are some of the top defaulters on Small Business Administration-backed 7(a) loans.
Don’t have your mind set on one brand before you examine all possibilities in that category. If you’re still feeling unfocused and unsure of which direction to take, consider working with a broker to help identify the best opportunity. A broker will interview you, asking questions similar to those listed above, and match you with an opportunity that will best suit your needs. Keep in mind that not all brokers represent all franchise businesses, so you may not be presented with a complete list of options. Before agreeing to work with a broker, be sure to exercise due diligence to understand their loyalties, who they represent, and how they are compensated.
Your emotions will be involved in this inventory process, and that’s OK, as long as you can put them aside to do a thorough analysis of your options. You ultimately want to have an emotional connection to your business; that’s one way you’ll succeed. But you can’t let your emotions cloud your initial decisions.
As you’re defining your options, keep your investment range in mind. If you will be relying on bank financing for your purchase, you will need to consider that it may be more difficult to get a bank loan if you will not have a physical location and hard assets. On the other hand, if you're looking at a franchise with a lower total investment, these often face a lot of competition and have a higher turnover rate.
Now that you’ve narrowed down your choices to your finalists, it’s time to get into the deep-dive research phase. You’ll want to start by requesting a franchise disclosure document (FDD) from each of your final choices. If you want quick and easy access you can also get free FDDs for various franchisors by signing up for a Birkhoff Community Membership. According to the Federal Trade Commission (FTC), you must receive the FDD 14 days prior to signing any commitment documents with a company. This is going to be one of the most important documents you will receive during the research process. The FDD is a very large, somewhat imposing report that details every aspect of a business, including financials, litigation history, the management team, the marketing plan and fees, names of franchisees, attrition rates, territories, the training and ongoing support structure, the communication plan and vehicles, how grievances are handled, compliance, and more. For a more in-depth look at FDDs, check out this guide.
Study the FDDs carefully. Do not skip over any section. Have your attorney or accountant review the financials and legal information, particularly if there are any red flags or signs of problems. This is your opportunity to learn as much about a company as possible before becoming a part of it.
Once you have reviewed a particular FDD, meet with the corresponding franchisor to discuss the specific opportunity in more detail. Make sure you obtain the franchise’s business plan, which will include the franchise’s vision, financial analysis, and marketing plan. A business plan is much shorter than an FDD and focuses mainly on how the franchisor and franchisee will make money together.
Meet with as many local franchisees as you can. Meeting with these local owners will allow you to see the day-to-day operations of the business, get a sense of the company culture, ask specific questions about the business and franchisor, and overall, make sure you would be a good fit. Ask, “What do you know now that you wish you knew before buying the franchise?” A franchisee's answer, good or bad, will give you additional insight into the franchisor. Remember that other franchisees will impact your business. The way they do business, how they treat customers and employees, and their reputation will help or hurt the brand, and ultimately, help or hurt you.
It’s Decision Time
Once you’ve completed your personal and financial inventory, have conducted your due diligence, and have met with franchisors and other franchise owners, you can feel confident in making your final decision. However, don’t sign anything until every last question has been answered, and don’t let yourself be pressured or rushed into making a commitment. Keep in mind, the average length of a franchise agreement is 10 years, so you want to be sure that you’re going into this relationship ready for the long haul.
Choosing which franchise business to be a part of is a huge decision. It will take an enormous chunk of your resources — financial, emotional, and intellectual — so it's important to spend enough time doing your research. You must critically analyze your needs and the franchise businesses you investigate to find the right fit. Once you find the perfect match, you’ll be in a great position to enjoy a long-term, prosperous working relationship.
image 1: Nic McPhee (Creative Commons BY-SA); image 2: ikayama (Creative Commons BY-NC-SA); image 3: Ianus (Creative Commons BY-NC-SA)