Shaun Lewis is the global COO of Cofix.
If you are just starting out as an entrepreneur, franchising may be an effective vehicle for you to launch or scale your business. Becoming a franchisee gives you access to a franchisor’s established business model and brand, market expertise, vendor partners and ongoing support. But first, you need to find a franchise opportunity that fits your company’s needs, qualifications and goals.
There are two main stages of researching and evaluating franchise opportunities. The first stage is exploratory—reading ranking lists, news articles and company websites. During this time, you can access publicly available information to narrow your options.
The second stage is analytical, occurring after you’ve made initial contact with a franchisor, and far more important. In this phase, once you’ve submitted an application and signed an NDA, you’ll receive detailed information about the business that allows you to make an informed decision—including financial statements, legal history, franchising models and expenses.
This period between initiating contact and signing a contract is a chance for both you and the franchisor to evaluate each other for financial and cultural fit. The franchisor’s objective is to recruit the right type of entrepreneur, and yours is to select the right type of franchise company. Use this opportunity to maximize the amount of information you receive from the franchisor. A company will typically share standard presentations and onboarding processes with potential franchisees, but it has additional information it will disclose on request.
Key Areas To Evaluate
1. Territory Availability
First and foremost, you need to understand if your desired territory is available. Ask about protected or exclusive territories. For example, you may want to open a store in Whitefish, Montana, but an existing franchisee could already have exclusive rights to that area. Or that area could be the domain of a master franchisee—one with exclusivity in a market but the ability to sub-franchise, which could allow you to operate a franchise under its direction.
If the market is open and no other players have an exclusive license to it, you should still ask follow-up questions, such as: What happens if a franchisee comes in later and wants exclusive rights to that territory? How would this affect your operating agreement?
2. Support And Training
The support you receive from the franchisor, both initial and ongoing, can be the difference between success and failure. Most franchises are built on the premise that their system is so solid that almost anyone, regardless of experience, can open a successful business. However, this premise relies on the franchisor providing comprehensive initial training and ongoing support.
Ask detailed questions about the process. How is training delivered—in-person, online or in a hybrid model—and by whom? Who can you call with operational problems or questions? Look for franchise systems with intensive initial and continuous training, hands-on launch assistance and on-demand business coaching.
3. Expenses
While most franchises have common expenses such as initial fees, royalties and marketing payments, get clarity on whether there are other less obvious costs. Are there fees for software, technology, store design or implementation? Are initial fees one-time or recurring? Are there required store renovation schedules? Make sure you understand all the potential costs upfront so there are no unwelcome surprises.
4. Multi-Unit Franchisees
Learn, either via your own research or the franchisor, how many franchisees own more than one unit. In some industries, such as food and beverage, strong franchises will have several multi-unit franchisees. This suggests that the business fundamentals are healthy and compelling enough for franchisees to continue opening more units. If there aren’t any of these examples, make a note; this could be a red flag, indicating weak business performance.
5. Financial And Legal Health
Independently research the brand and franchise network’s financial health through news articles, industry reports or public filings. Is the business growing or shrinking in terms of total units year-over-year? Has it survived a recession or pandemic?
Investigate whether there are any past or current lawsuits from franchisees. While not all lawsuits are red flags, franchisee-initiated suits could indicate problematic patterns. Ask the franchisor for clarification about any concerning information.
Strategies For Making Smart Business Decisions
1. Take Advantage Of The Due Diligence Period
Use this time to fully understand the benefits and the challenges of the business. Request additional information, ask questions, conduct financial analysis and have conversations with people in the business and the industry.
2. Build A Comprehensive Business Case
Before signing anything, read the contract thoroughly. The franchise agreement will prevail in any future disagreements, so understand all provisions, even those not explicitly discussed.
Create a financial model using real-world data to validate the business’s viability. For example, request quotes for commercial space leases and product costs, and factor in other costs, such as local wages, utilities, insurance and financing for loans. Ask the franchisor for an investment worksheet and a sample P&L, and don’t be afraid to ask about each line item. The company should also provide you with benchmarks for items including startup costs, cost of goods sold and rental and staff expenses.
3. Don’t Neglect The Ramp-Up Period
Most businesses don’t become profitable overnight. In the food and beverage industry, for instance, it may take one to three months for a cafe or coffee shop to break even. Plan for a realistic financial runway while customers are discovering your business. Set aside additional funds to help you weather the slow start and avoid a cash-flow crisis.
4. Be A Customer
Experience the business from the customer’s perspective. Visit a store, make a purchase, chat with staff and observe the comings and goings. If possible, check out stores in different markets to assess consistency.
5. Get Real-World Insights
Ask the franchisor to connect you with at least one current franchisee. Gather information from the franchisee about the brand’s franchise culture, levels of support, benefits and challenges. Request business cases, profiles of currently operating units to demonstrate how the business model works in real-world conditions.
Deciding which franchise opportunity is right for you is a complex process that shouldn’t be rushed. Take your time. Pay attention to the details and the overall experience for insights into what a business relationship would look like with this franchisor. Timeliness, responsiveness, transparency and cooperation are all positive indicators; evasiveness and heavy sales pressure are potential warning signs. Your ideal partner will want to form a lasting, mutually beneficial relationship as much as you do.
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