Franchise Selection Criteria; What’s Important?

Most franchises have very compelling web sites with enormous amounts of information on why their brand is a great business opportunity. The whole purpose behind franchise companies posting such information on the internet is to catch the curiosity of buyers and hopefully bring more franchise owners into their system. A franchise investor needs to get beyond the thrill of the web site and dive deep into areas that really count before any decisions are made. The following need to be scrutinized:

1)    Strength of the Corporation: An established corporation that is operating in the black, has good liquidity and has been around for several years is a good start. A strong leadership team with specific goals for growth, expansion and development of the franchisee is important.  Understanding the level of support and training offered may be crucial to a franchisee’s success.

2)    Trending of store count: Although franchise systems develop and populate at different rates, it’s important to confirm that a franchise system is heading in the right direction. This would simply mean that the total number of stores in the system is increasing from year to year. However, expanding at too fast of a rate could spell trouble as these  franchise companies sometimes get too caught up in new store sales and pay less attention to existing franchisees looking for corporate help. There needs to be a balance of resources spent on new outlets and existing outlets. If store count is decreasing from year to year, watch out!

3)    Validation by other owners: Careful analysis of what other franchise owners are saying about the brand and all that it stands for is critical information that you will only get from individual owners. Existing owners will provide the most realistic insight as to what it is like owning a particular franchise brand. Being well coached on how and what to ask will keep the information faucet wide open. You will learn things that you will never hear from corporate.

4)    Knowing the numbers: A complete understanding of the franchise fee, royalty, advertising fee and all other costs associated with getting into a franchise model is critical. A franchise investor must know what kind of money will be needed to reach break even. Although most costs are outlined in the Franchise Disclosure Document (FDD) a financial buffer should be built in for safe keeping so the new franchisee doesn’t run out of money. 

5)     Size of Territory: Franchisors define territory in many different ways. Some are defined by geography, population demographics, socio-economic demographics, number of businesses and so on just to name a few. It’s a little tricky to understand the value of a territory. This is where a professional can play a large role in providing valuable insight. All territories are not created equal and your due diligence in this area is imperative.

This short list of examples identifies areas of concern that are not easily seen or advertised by the franchisor but can be discovered with focused analysis and the help of a professional. When establishing criteria for making a decision on investing in a franchise, it is imperative to peel back the layers and get to the data that is significant in making a final decision.

Seventh in a series of 8 posts by Al McCooey, President of Summit Franchises and a franchise consultant who helps clients identify excellent fitting franchises that they will enjoy operating and have the opportunity to be highly successful at. Learn more about Al and franchising at Next week: Why use the FREE Serrvices of a Consultant?

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