Franchises are attractive to the first time business owner. They are sort of like one of those home theatres in a box. The business owner doesn’t have to pick individual components and make sure they work together. The franchisor has already determined all of that. The franchisee has to take the training, follow the instructions and the business should operate successfully.
This can be true in many situations but not in all of them. Franchises should be investigated with a level of due diligence that compares to that done for the purchase of an existing private business. You are going to be investing a lot of time and money into this franchise so make sure you have your eyes wide open going in.
The first thing I would consider is the strength of the brand. Is the brand so strong it will automatically drive sales? Is it just a regional brand that has no customer awareness in your area? The answers to these questions will have a big impact on the value of the franchise and the effort you will have to expend to build business.
How strong is the management system? Is the system really strong in that all franchised outlets are run identically with a consistent customer experience or is there wide variation between locations? How well run is the franchisor’s head office?
What is the return on your investment? Will you get a sufficient return for the risk you are taking? There is no point getting involved in a franchise to basically buy a job for yourself. You could take a job somewhere and get paid the same amount with no investment at risk.
Look at the overall industry and identify any trends that could affect you. Are there competitors that are starting to rise up to provide a real challenge? Talk to franchisees and get revenue and cost data from them. Don’t rely on proforma financials from the franchisor.
Talk to your banker. If the bank has a formal franchise package for your particular franchise that is a very good sign. It means that the franchisor has a relationship with the bank and there might be buy-back agreements or other agreements between the two parties that will make your loan application process much easier.
Most of all, make sure you have a passion for the business. If the business doesn’t interest you, it doesn’t matter whether it’s a franchise or a private business, you won’t have the drive to succeed during the tough times.
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