Picking a franchise to invest in is a big decision, and one that often requires a lot of soul searching. Beyond the financial investment that these businesses require, there are many personal sacrifices and a certain level of risk that is involved in becoming your own boss. Yet, the opportunities available are boundless and the potential rewards can certainly outweigh the inherent risks. But where do you start looking for the right franchises and how do you find the ones with the best returns? Sure, your favorite corner deli has lines around the corner, but how do you know if this same store will do well in a completely new market with you behind the counter?
Here are our recommendations on the top 5 questions to consider in a franchisor:
- How good of a product/service does the franchisor provide? This may sound obvious, but it cannot be emphasized enough. At the end of the day, a great brand and a great marketing program can’t hide a bad product. Is the franchisor more focused on franchising their brand or are they investing to keep up with changing tastes and maintaining the quality of their products? This is a very important question to consider before investing in a franchise.
- Does the franchisor have a track record of success? If you’re looking into a well-known franchisor, ask for some financial data on the performance of its stores. State and federal laws encourage franchises to provide sales and earnings data to prospective franchisees which allow you to understand what type of returns you can expect on your investment. If the franchisor refuses to provide this information, be skeptical. Make sure to reach out to current franchisees as well. These are the people that will likely give you the best information, since they have first-hand experience in working with the franchisor.
- What type of marketing support does the franchisor provide? If the franchisor requires you to pay a marketing fee, how does the company spend that money? A great example of good marketing spend is Subway’s $5 footlong campaign that brought profits to its franchisees during a challenging economy. If the franchisor requires you to do your own marketing, how much does the company require you to spend and do they provide you any guidance on the best marketing methods?
- Does the franchisor provide any training or resources? One of the key benefits in joining a franchise is access to the company’s expertise. It’s important to consider whether the support they provide is worth the royalty fee that they charge. For example, McDonald’s runs Hamburger University and provides volumes of written materials, on-site restaurant instruction, and various on-going workshops to help train any potential franchisees. Most franchisors will not provide quite as much training, but you should definitely factor in the support provided by the franchisor when considering your options.
- How many of the franchise locations are company owned vs franchised? If the franchisor is keeping many of the prime retail markets for itself, you should really think about what the investment opportunity looks like beyond those areas.
Asking these five questions is just the start in your franchise diligence process. Finding the right franchise is a tedious and challenging endeavor and one that should not be done quickly. Take your time, talk to as many people as possible and ask questions! Remember, making the wrong investment decision can cost you many years and hundreds of thousands of dollars.
This article was originally published by Franchise.com
About the Author
Kal Gullapalli is the CEO of SmallBizeo.com. SmallBizeo.com offers objective franchise recommendations to its audience through rigorous research. Similar to Wall Street, SmallBizeo.com generates in-depth research reports highlighting the strengths and weaknesses of various franchise systems. Today, SmallBizeo covers over 200 different franchises that span across 10 different industries.
Published: July 16, 2013
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