Selecting a franchise concept and becoming a franchisee is no small feat. It’s not for kids. You are partnering with the company for at least 10 years and in many cases that franchise will be predominantly responsible for feeding you and your family and possibly putting your children through school.
If you didn’t do the proper homework and research and put in the requisite time to study the concept you’re about to throw all your savings into, you could get burned big time. And sometimes the buyer’s remorse after realizing you picked the wrong concept can be crippling.
We asked Jeff Lefler, CEO of Franchise Grade to give us five things potential franchisees should look out for before jumping into a franchise concept or system. Lefler has 15 years of small business experience, 10 of those in franchising.
His company looks out for and provides franchise investors the opportunity to grade three comparative franchise systems as part of their due diligence. The research, assessment, grading and reporting services correlate information from a diverse cross-section of stakeholders in different franchised industries: retail; manufacturing; finance; and service across North America.
Sort of like “franchise police” so to speak. Here are the five things he told us potential franchisees should be on the look out for.
He says when you start to look at a franchise you are investing in a business. You have to determine pretty early if you are comfortable with yourself as a business owner. It comes with a lot of risks and you need to ask yourself if you have the skills necessary to run the business. You’ll also need to consider your family situation and how they will be affected once you begin the investment.
That being said, here are five things to consider before going with a particular concept.
Health of the Franchisor
First thing to look out for is the health of the franchisor. Are they financially stable? Is the franchisor making money and will they grow as your business grows. You want to partner with a franchisor that is forward looking and has the ability to grow their business, which in turn is going to help you as a franchisee increase brand awareness.
You also have to be mindful of how much fees you are going to be paying as a franchisee. That’s another critical component. Looking into not just the royalties but some franchise systems or concepts have advertising fees that are either national advertising fees or local advertising fees. Other franchise systems have co-op fees and even minimum fees. Some systems require that no matter how much business you bring in you still have to pay X-amount minimum to the franchisor. It could be three to five thousand dollars a month as a minimum payment regardless of how much you sell. The concern with that is even though the royalty rate could be 6%, the amount of fees that are required could be as high as 14% or 18% sometimes even 20%. So for every $100 that you spend you are already committing $20 to franchisor fees.
Other Investors in the brand
You also have to look into whether or not there are a number of other investors investing into the brand. So looking at the franchisors unit growth through the course of three to five years. Are they growing? Do you see a positive growth in their systems.
Also keep an eye open for the franchisees that have exited. In their franchisor’s disclosure documents they list the number of terminations, the number of ceased operations and the number of franchisees that were reacquired by the franchisor. So by looking at that information you can also tell if there is some underlying issue and if a number of franchisees are exiting the business that’s obviously a red flag to wonder why so many are exiting the business.
Another thing to consider is the cost. Making sure you have enough working capital. Franchisors will list a certain amount of working capital but typically it’s under valued so assessing how much you’re going to need to keep your business open, keep your staff paid, making sure royalties are covered, just making sure you have the financial capability of sustaining a growth period of your business and you’ve got the working capital to succeed.