Your Introduction to Evaluating a Franchise Opportunity

Franchise financing options are plentiful. But should you finance a franchise purchase with borrowed money?

5 Themes to Consider Before Investing in a Franchise

Evaluating a franchise opportunity effectively will eliminate the one thing that is stopping you investing: fear. The fear of not investing in a franchise at the right time. The fear of incorrectly valuing a franchise.

As a first-time franchisee, you should expect to get cold feet. It’s a big step you are considering. A leap of faith that shouldn’t be. Evaluating a franchise opportunity effectively will help you assess the potential for it to produce the income you desire.

In this article, we examine the five themes you need to address when considering a franchise as an income-producing investment. We recommend using these themes as a step-by-step process checklist for evaluating a franchise opportunity.

  1. Information gathering

Information is power. Buying a franchise is a long-term investment, a business relationship with which you’ll need to feel comfortable. 

You wouldn’t get married without knowing about the person you are marrying. You shouldn’t buy a franchise without knowing about the franchisor and the business opportunity. Information you should gather and assess includes:

  • Financial information, such as audited accounts and bank references

  • Information about current performance

  • Information about the franchise’s franchisees

  • Assessment of the market opportunity – are the franchise’s products or services in demand, and is this demand expected to continue?

  1. Training and support

Now you know that the franchisor and their business are financially solid, you’ll need to start assessing the viability of the franchise as a business for you.

One area in which you’ll need to be assured is that of training and support. Here are some questions you should get answers to:

  • Will the franchisor provide adequate support at the beginning and throughout your period as a franchisee? 

  • What training will they offer you and the people who work for you?

  • What marketing is provided by the franchisor?

  • Is there an operations manual that explains the business model, processes, and practices that you will be following?

  • Will the franchisor help you to recruit new employees as they are needed?

Don’t underestimate the importance of support and training – especially if you are investing in the business as a vehicle for largely passive income.

  1. Legal issues

You’re entering into a legally binding contract. Perhaps the most important document you will receive is the Franchise Disclosure Document (FDD). This sets out the terms of business between you and the franchisor. In its 23 sections, you will find information that covers elements such as fees, initial investment estimates, restrictions on what you can sell and do, your obligations, and terms under which the agreement can be terminated, among others.

You should hire an experienced franchise attorney to review the FDD and provide their advice to you.

  1. Financing the franchise

You’re happy with the franchise, the business opportunity, the ongoing package of training and support, and you’ve had the FDD reviewed. Now you need to consider how to finance the purchase you intend to make. 

We’ve discussed whether you should borrow to invest in a franchise previously, but as a reminder it is our experience that the best franchise investments are made when you have the funds to do so (with some notable exceptions).

As well as considering how to finance your investment, you should:

  • Allow for working capital to cover cashflow requirements

  • Be realistic about potential sales revenues and profits

Be detail-oriented and conservative here.

Review revenue and profit forecasts, and make sure you are happy with them. Be certain how sales are made, and revenues build up, and take a long, hard look at the franchisor’s financial projections. Create a business plan in which no t is left uncrossed and no i is left undotted.

Being detailed in your approach will ensure you capture all relevant information.

Being conservative in your estimates will help you use that information to determine realistic expectations of the franchise’s income-producing potential.

  1. Curiosity does not kill

Forget the saying that curiosity kills. When you are buying a franchise, it pays to be curious. Never be afraid to ask questions, and never think that a question is dumb. Always seek clarification of details, and always use trusted partners to help you through the process of buying a franchise.

It’s decision time

Evaluating a franchise opportunity is not easy – nothing that is worth doing ever is, is it? By this stage, you should be sure that the opportunity is a great one. If the franchisee likes what they see, you’ll be offered the chance to become their next franchisee. It’s decision time. We think we know what your answer should be.

Our job as your franchise consultant is to seek out the best franchise opportunities for you – the ones that will help you achieve your unique objectives, skills, experience, and qualifications. To learn how we do this, and the advantage our tailored process gives you, get in touch with New Ground Consulting. Your success is our success – which is what has made us so successful.

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