Investing your hard-earned money into a franchise might seem like the safer route to business ownership, but buyer beware. While franchising is often marketed as a lower-risk alternative to going independent, due diligence is required as some franchise opportunities are more dependable than others.
Making any long-term financial decision involves some level of risk but when it comes to identifying the best franchise ownership arrangement that fits your goals, it pays to thoroughly evaluate your options beyond brand recognition and so-called “proven systems” that franchisors will boast about in their business plans to potential investors.
The fact of the matter is, while many well-known franchises will showcase their public reputations as highly positive, many of them are struggling behind the scenes with poor management and feeble financial performance.
But you can avoid making costly mistakes if you know how to effectively evaluate the franchise opportunities that can truly minimize risk and deliver long-term returns on your investment as a franchisee. That means focusing on transparency, market demand, franchisee feedback, and financial performance to identify the right franchise for you.
What Does “Proven Success” Actually Mean?
It’s a term you’ve run into many times when exploring franchise opportunities. A company proudly exclaiming their “proven success” with a business model that is both recognizable and profitable in the marketplace. But when you are weighing your options, it’s essential to first define what success looks like as a franchise business.
“Proven success” is more than just brand recognition, it comes with many indicators that establish the business model as one that consistently performs well through multiple territories and market conditions.
So what should you look for in an opportunity that isn’t only promising but actually “proven”?
Consider the following:
- Market longevity, typically over a period of ten years or more.
- Strong franchisee satisfaction
- Robust brand equity.
- Consistent unit growth
- Positive financial results across many locations
Long-term stability and routine consistency are the true hallmarks of proven success. Anything less could put your business at higher risk of failure.
Evaluate the Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is the blueprint of your business-to-be and it contains twenty-three separate sections that outline all the rules, regulations, and obligations governing the relationship between you and your franchisor.
Read and fully digest what is outlined in the Franchise Disclosure Document to learn everything you need to know about the franchise and detect any red flags that might conflict with the brand’s claims of “proven success”.
Every section is important, but some provide more vital information to help you decide whether or not to enter into a franchise agreement into a flourishing and successful company:
- Item 19 – Financial Performance Representations: This section explains franchise average revenues, profits, previous and current projected financial performance of locations, and other financial metrics.
- Item 7 – Initial Investment: This section explains all of your financial commitments and responsibilities related to the full cost including all fees and expenses, of buying into the franchise.
- Item 20 – Outlets and Franchisee Information: This section outlines the statistical data of franchised outlets with new openings, closed outlets, transferred and terminated franchise ownerships over a three year period.
- Item 12 – Territory: This section establishes exclusivity of your assigned territory and how many other franchisees, if any, you may be competing with throughout that territory.
- Item 3 – Litigation: This section discloses previous and current lawsuits the franchise is involved in and this part of the FDD can be very revealing as to whether or not you want to be associated with the organization.
A franchise with true proven success will always be fully transparent and consistent in their Financial Disclosure Document, but you should pay special attention to these sections in particular as you consider your participation.
Speak to Other Franchise Owners
No one will be more honest about their experience with the franchise than current franchise owners. Positive and negative feedback from owners will give you their unfiltered and explicitly upfront thoughts about the reality of running a business under the franchisor umbrella.
When you speak to current franchisees, it’s important to know which questions to ask as you determine if this is the right opportunity for you and your business goals. Discuss how the franchisor supports the location, if financial expectations are being met on a consistent basis, and the major challenges that had to be overcome during the initial year of operation. Learning as much as you can about the franchise owner experience is a vital part of the decision-making process before you commit.
Listen to the pros and cons of the business from those who are involved now and if you hear the same positive or negative opinions from multiple franchisees, consider these patterns and how they might affect your involvement as a business owner.
Evaluate the Unit Economics for Franchise Owners
While the franchise may seem successful and the brand is demonstrating positive market recognition, how does that translate to success for each franchisee? To better understand how franchise owners fare as part of the organization consider these factors:
- Average revenue per unit
- Break-even timeline
- Profit margins
- Return on investment (ROI)
Once you have determined these financial aspects of ownership under the franchisor, weigh these numbers against your own financial objectives, participation, and risk tolerance as a business owner.
Proven success for a franchise should demonstrate strong and sustained profitability throughout the entire network instead of just a few locations in high-performing territories.
Analyze Market Demand
What works in one market doesn’t necessarily translate into success in another. That’s why you need to do your research as to whether there is robust demand for the product or service offered by this franchise. Consider important factors such as target demographics, market saturation, competing businesses in the territory, and consumer trends.
Growth potential may be strong in a region that is underserved by the type of product or service you would be offering while another region may be saturated with competing businesses offering the same product or service and that could dramatically impact your ability to succeed.
Determine Realistic Brand Power and Recognition
The strength of the brand plays a large role in whether or not your franchise operation succeeds or fails. One of the advantages of buying into an established brand instead of starting a business from scratch is the built-in apparatus of customer loyalty, nationwide presence and visibility, strong marketing campaigns, and operational stability.
Look for clear brand identity, the size of their online presence, positive response to that presence, national or regional marketing efforts, all of which can tell you a whole lot about that franchise’s actual brand strength and recognition in the marketplace.
Training and Support Programs
Franchise owners don’t have to go it alone when they buy into the system. But the strength, reliability, and level of assistance of the support given to franchisees can mean the difference between success and failure.
Explore the types of training programs that are offered to franchisees before and after the opening of the location. How much ongoing support and coaching can you expect to receive? Marketing assistance and technology to help the location thrive are also vital components that are extremely helpful for running a successful franchise.
Learn more about these programs and how much the franchise is willing to invest into your growth as a franchise owner. Weak or inconsistent support may be telling you to look elsewhere for other franchise opportunities.
Assess Franchisee Turnover Rates
A strong, healthy franchise organization should have low turnover rates as owners are satisfied with the system and succeeding in their respective territories and new potential owners are eager to get involved.
High turnover rates can signal something is wrong within the system if owners are consistently leaving or selling their unit locations. Assessment of this data will be extremely valuable as you consider becoming an owner within the network.
Research Franchisor Leadership
A consistently successful franchise brand is led by an effective and experienced team at the top and their background, industry expertise, and vision for the future of the brand are the foundation on which that success is built.
Do your due diligence on the leadership team tasked with ensuring long-term achievement within the industry and be sure you feel comfortable with their track record of success and the vision of where they see the franchise in the next five years.
Franchisors who place a greater importance on sustainable growth over rapid scaling are often more likely to protect the quality of the product or service and provide ongoing support to owners within the network.
Talk to the Experts at Franchise Dream Team
Identifying a safe investment for franchise ownership is not about chasing popular brands but finding the right opportunity that aligns with your goals and risk tolerance using thorough and disciplined tools for data and brand education.
Fortunately, the franchise consultants at Franchise Dream Team have asked the tough questions, verified the claims, and performed extensive research into the best investments for first-time and seasoned franchise business owners alike. We approach the process as you would, like an investor, analyzing the data and researching operational support and growth potential and how it aligns with your financial objectives.
We can help you find the franchise opportunity that’s right for you by discussing your goals, your lifestyle, the amount of time you can devote to running the business, and level of financial investment you are prepared to commit. From there, we identify the franchise opportunities that fit your goals and help you begin the process of learning more about the franchise, reviewing the FDD, and ultimately putting you in position to become a franchise business owner.
Reach out today to schedule a consultation and let’s get you started on the road to business ownership as a franchisee.
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