What to Look for When Evaluating a Franchise
The first place to look: The mirror
Unless you know what you truly want from your prospective business, you will waste time looking into the wrong franchises. Take time to figure out:
- Are you OK with following someone else’s rules and processes? If you seek a highly creative, personal outlet, franchising may not be for you.
- What are your goals for this business venture? Income? A more flexible schedule? The chance to be your own boss, but with less risk than you’d have if you set up a small business?
- What level of commitment are you willing to make? Franchises are usually multi-year commitments and you can’t necessarily exit them quickly.
Is there a demand for this product or service in your area?
A great-sounding franchise could be a dud if your area just doesn’t need what it provides. There’s a good reason some franchises are regional and not national. If there is demand, who are the established competitors and can a new franchise make a dent in their business?
Does the franchisor send a mixed message?
How committed is the company to backing individual owners? The American Association of Franchisees and Dealers says to watch for these red flags: Does the franchisor have a large proportion of “company-owned” locations that aren’t owned by local, independent owners? That could indicate that the franchisor has problems getting owners on board. Does the franchisor sell its products in ways other than franchising, such as in grocery or discount stores? That could indicate a less than committed attitude toward the franchise model.
How does the franchisor’s staff treat you, as a prospective owner?
Business News Daily notes that the franchisor ought to impress you as a professional.
- When you contact the company, do you get a swift response that addresses your questions directly, or do you get delayed responses or promotional plugs?
- Is the franchisor’s sales team more interested in selling you a franchise than in helping you decide if their business is the right fit for you?
- Do they peddle franchise myths (such as “Franchises just can’t fail”) or do they offer objective facts and figures about their business?
Does the franchisor provide a strong support system?
Good franchisors will have your back--not just when you first purchase a franchise, but as long as you’re part of the franchise family. Look for companies with ongoing support across all areas of the business, including these:
- Marketing help. Does this company understand how to market in your geographic area? How much marketing and advertising money will you have to contribute?
- Training. Will the franchisor train you not just at the start but throughout the years you own your franchise?
- Supplier connections. Does the franchisor have solid relationships with suppliers?
- Connections with other franchise owners so you can share ideas and experiences.
- A protected territory, so yours is the sole franchise in a specified area.
What does the Franchise Disclosure Document (FDD) tell you?
Reviewing the FDD is a crucial step in evaluating any franchise. The FDD describes the franchisor’s obligations to the franchisees. It lays out the franchisor company’s background and finances. Don’t scrimp on this step: Review it carefully with your franchise licensing advisors, or get a lawyer who knows the franchise and sit down together to review the FDD carefully.
Why spend that extra cash? If you’re so serious about buying a franchise that you’re looking at an FDD, you are already close to making a huge investment of your money and your time for years to come. The Federal Trade Commission, in its useful A Consumer’s Guide to Buying a Franchise, notes how the FDD unveils details including:
- The company’s litigation history. Has it been sued? Who sued it, and why?
- Bankruptcy history.
- Initial and ongoing costs to the franchisee. That’s your money.
- Terms for renewing, terminating, or transferring ownership. How hard is it to get out of your franchise contract or sell your franchise?
- Dispute resolution terms. What are your options if you end up in a dispute with the franchisor?
- “Financial performance representations.” Companies are not required to give you sales and earnings information, but most franchisors provide it. If a franchisor doesn’t provide this information, that could be another red flag.
What do franchise owners say?
Franchisors will hand you a list of franchisees willing to talk about their experiences. Use that list, but also talk to franchisees who aren’t on it. Discussions with current and former franchisees are “perhaps the single most important part of your due diligence,” says Inc. magazine. The Federal Trade Commission also advises talking with franchise associations, such as the AAFD, and the FTC itself.
When you evaluate a franchise, look for local demand for its services; solid support systems for franchisees; a professional staff; a clear commitment to the franchise model and to franchisees themselves; and openness about financial prospects. Take time to talk directly to franchisees. Inspect the FDD in depth. With these steps, you’re on your way to finding your ideal franchise.
To learn more about the growing franchise opportunities in kitchen and bath remodeling, find out what Kitchen Tune-Up and Bath Tune-Up are telling prospective franchisees like you. Visit franchise.bathtune-up.com, or ktufranchise.com, or call 866-437-0202 to speak to a franchise licensing advisor.