Investing in a franchise means you’re stepping into proven processes, support systems and success ... if you invest in the right brand.
Buying a franchise is like getting married and we all know that before walking down the aisle, you want to make sure your partner is the perfect fit. The same goes for franchising. Find the Clark Kent to your Lois Lane and you’ll be thriving in your new franchise for years to come. Choose the wrong brand, however, and that buyer’s remorse will hit you harder than the Hulk.
You may know what you want in a marriage partner, but purchasing a franchise comes with its own unique set of criteria. The key is knowing what to look for before you start the buying process.
These are our top 5 things to know before purchasing a franchise:
1. Important Franchise Disclosure Document items
We don’t want to sugarcoat it: an FDD can be overwhelming. While an FDD is simply a document that informs you about the business opportunity, it’s usually a few hundred pages long and filled with confusing legal language.
The good news? You don’t have to work through it alone. Actually, we highly recommend you don’t. Find a sidekick or franchise advisor to walk you through the process and they can connect you with a trusted franchise lawyer to review the FDD. Make sure you’re comfortable with and fully comprehend each item.
The two items to pay attention to when you begin reviewing potential franchise investments are their FDD’s item 7 and item 19:
- Item 7 lists out your estimated initial investment, so it’s an important step to ensure you fully understand the cost to get started.
- Item 19 discloses the “Financial Performance Representations”, or in other words, what you could expect your ROI to look like. Some franchises disclose specific profit information in their Item 19, like sales and expenses for specific locations. However, franchisors are not required to disclose financial performance representations or FPRs if they choose not to.
2. Franchisor leadership team
We all love a good founder’s story, and not just because of the emotional connections they create with consumers. A strong foundation is essential when looking for a franchise to invest in. An exceptional founder and corporate team translate to franchisee success, so it’s important to ask the following questions:
- Who is leading the vision of the company?
- How much experience does the franchisor leadership team have in the industry?
- What teams have they put in place to support their franchisees?
- Are they passionate about both the business and franchisee success?
- Do you feel like the franchisor is someone you’ll enjoy working with?
- Does the franchisor listen to and apply franchisee feedback?
3. Territory definition and availability
Finding your franchise fit is more than just buying into a successful concept. Making sure you’re buying strong territories is key to your success.
Many established franchise brands not only have expensive fees, they also have limited territories. If you’re buying into an Orangetheory or Chick-fil-A, you’re most likely picking from all the leftover, undesirable territories. Not only do you want to ensure key territories are still available, but you also want to keep future growth opportunities in mind.
You need to have a clear understanding of how each franchise defines territories. Every franchisor defines territory differently. Some offer no protected territories at all, while others have mapped out the entire country. A handful of franchisors will be more flexible and work with you to define custom territories.
Service-based franchisors and retail franchisors will usually map territories out a little differently:
- Service: Territories may be defined by a minimum number of eligible core customers, e.g., businesses, rooftops, persons, etc.
- Retail: Territories may be defined by square miles, intersections, driving distance, etc.
When deciding which territory you’d like to develop, there are many things to consider. Here are a few questions to ask yourself:
- How many territories/units/stores can I afford?
- What do I expect each territory/store/unit to create in net profit?
- How many will I need to reach my net profit goals?
- How close do I want to be to my territory?
- Do I think someone else may purchase the territory I’m interested in if I don’t buy it now?
- If someone else purchases it how will it affect my overall vision for my franchise?
- If I buy multiple territories now, what is my required timeline to open each one?
- When do minimum royalties begin?
- If I buy multiple territories do I have the ability and resources to properly staff & serve those areas?
4. Franchisee success
What better way to understand how successful a franchise will be than by talking directly to active franchisees themselves?
Validation is the most important step in the franchise buying process because it gives you direct access to ask questions like:
- Has business met your expectations?
- Do you feel supported by the franchisor?
- What is something you’d like to see the leadership team do differently?
- What is your greatest challenge in the business?
- If you could go back in time, would you make the decision to join this franchise again?
Validation calls are crucial because they not only give you an inside look at what life will look like as a franchisee, but you can also trust the information you’re receiving. Unhappy franchisees aren’t afraid to tell you like it is, and thriving franchisees will help confirm your decision to invest.
5. Unique selling propositions
Buying a franchise in an industry you love doesn’t always mean a strong return on your investment. If a brand sounds like a brilliant concept or is in an industry you understand, you still want to make sure they have their own set of unique selling propositions. What are they offering customers that other brands are not?
USPs don’t have to mean a super unique product or service to be extremely successful. Many brands, particularly in the home service industry, have simply found a way to stand out from the competition, with USPs like:
- Prioritizing incredible customer service
- Strong, recognizable branding
- Successful customer acquisition model
- First to market
- Technology-driven
- Incredible culture with happy employees
Keep in mind, that while all this information may feel like a lot, the franchise buying process doesn’t have to be overwhelming. If you work with the right team and pick a strong brand, you’ll feel like it’s the perfect fit. The bottom line is to make sure you understand what to look out for, and the right questions to ask.
The best way to ensure you’re getting an objective look at a brand, and are handling your due diligence, is to work with a reputable franchise advisor. Not only do they work for you and have your best interest in mind, but like a real estate agent, their services are free to clients. Their fees are almost identical from brand to brand, and are paid by the franchisor, so advisors don’t make more money by steering you toward a particular brand. They want to make sure you’re successful and should have your back throughout the entire journey.
