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In my experience, many individuals get locked into a specific franchise opportunity before fully understanding their options. We call this consumer driven investing, where they view a franchise opportunity through the eyes of a consumer rather than investor. They have an emotional connection to a specific franchise opportunity and will not consider alternative franchises.
To identify the best franchise investment opportunity for you, every prospective franchisee needs to know the choices they have before making a premature decision. If a candidate has an interest in a franchise in a certain franchise category whether its Senior Care or Children’s Services it’s important to gather information on the key areas. Whether performing your own analysis from FDD’s or visiting a website like Franchise Grade, the primary objective is gathering facts.
Following is a list of some key items that can easily be obtained from an FDD or franchisor website:
1. What is included with the initial franchise fee? Compare this to the alternative franchises.
2. How much experience does franchise leadership have? Look for ownership with a strong franchise background and look at a previous franchise they led or worked with.
3. Does the franchisor have a history of positive franchise relations as evidenced by little or zero litigation?
4. Are the royalties and advertising fund fees comparable to similar franchise opportunities and the franchise sector?
5. Compare the Item 7 investment estimates for each franchise.
6. With territory rights, focus on the definition, size of the territory and protections a franchisee has. Ask the franchisor how they determine a territory.
7. Does the franchisor make an Item 19 Financial Performance Representation? If so do, they show more than just revenues? If there is no FPR and the franchise is not a startup, walk away.
8. Carefully review the tables in Item 20. Compare the growth of each franchise brand and amount of franchisee turnover.
9. Speak with franchisees from the brands you are considering. Getting feedback from them will carry a lot more value than what the franchisor is telling you.
This list represents part of what will go into the comprehensive due diligence you must do before investing in a franchise opportunity. It’s important to conduct some preliminary research into different franchises before locking into a franchise opportunity too quickly.
