Your 10-Step Franchise Evaluation Checklist
Before you leap into franchise ownership, it’s important to understand how to evaluate a franchise opportunity. Just like you would appraise a real estate or weigh up the pros and cons of a new car before you commit.
You wouldn’t dream of buying a new home without being certain it’s right for you, would you? You move from being a prospective homeowner to a proud homeowner by making certain you are spending your money wisely.
This article will help you assess any franchise opportunity that is presented to you. Putting this franchise evaluation checklist into operation should ensure you make a great decision that moves you from potential franchisee to profitable franchisee.
Is franchising right for you?
The first step is to discover if franchising is right for you. The best and easiest way to do this is by taking a franchise aptitude test. If you’re not cut out for life as a franchisee, this test will tell you – and you’ll save a lot of time, potential disappointment, and the risk of financial loss.
Okay. You’ve taken the test and discovered that you’re the perfect candidate to become a successful franchisee. What’s next?
Is now the right time to invest in a franchise?
Timing… is everything. Or so they say. You’ll need to consider how you will finance your franchise purchase (maybe you could leverage your 401(K), for example) and your personal motivation.
If the funds are in place or you have access to them, and you’re highly motivated to be successful running your own business, before you start assessing individual businesses, look at the big picture.
Is the market right?
The economy moves through cycles. Sometimes with big shifts, like we saw in 2020. Take a top-down approach and think about the market before considering individual businesses and opportunities. You’ll make a much better franchising choice with this strategy.
So, what’s the take on the market as I’m writing this article? You can find out the hit sectors for franchise investment in my article ’10 best franchises to buy in 2021’.
Consider the company’s history and finances
Now we can start looking at the finer details of specific franchise opportunities. Let’s begin with the history of the franchising company. Here is the type of questions you should be asking:
Articles 1, 2, and 3 in the Franchise Disclosure Documents will detail the company’s history, any litigation, and bankruptcy filings.
The FDD will also include the company’s financial statements. Take a close look at these, and get a feel for how the company is run financially.
What is the investment required?
A good franchise consultant should never present an opportunity that will stretch beyond your financial capability, but it is always good practice to make sure that you are comfortable with the level of investment needed to proceed.
Be assured, too, that the franchisor will examine your financial capacity to proceed and fund your franchise as it gets off the ground. Poor financial planning and inability to ride cashflow problems is one of the seven reasons why franchises fail.
Check out the royalties
When considering your franchisee finances, make sure you assess the royalties that you will be paying to the franchisor. These will impact your profitability, but are a necessary cost of being a franchisee – it’s only right that the franchisor turns a profit as you make sales.
There are various ways in which you may pay royalties. Look to see how the royalties are paid (for example, on a sliding scale as revenues increase) and if there are minimum royalty payments. Don’t be put off by the need to pay royalties. All franchisors charge them. Instead, make sure you understand them and factor them into your business planning.
Understand the operating model
One of the reasons you are considering becoming a franchisee is because the benefits of buying a ‘turnkey’ business that is proven to be successful. Remember that this success is based on a tried-and-tested business model, which you will be expected to follow. Therefore, make sure you understand the model and the restrictions it may place on ‘creativity’ in how you run your business.
Training and support
Now we’re getting to the finer details of the franchise opportunity. Even if you have previous business experience and the skillset to run a business in the niche you are considering, the training and support that the franchisor provides is important to consider.
Procedures and good practices evolve, and you’ll need training on these. You should also find out what support you will receive across areas such as hiring, training of staff, and marketing. Speak to other franchisees to find out how approachable the franchisor’s management is should you need help with real-world challenges.
We’re really starting to drill deep now. You’ll want to know about location and if the territory is trending up or down. A good tip here is to visit City Hall and find out about plans for the area. Remember, it’s in the interest of the franchisor as well as your interest to invest in a growth location.
Your exit strategy
It may seem odd to consider how you plan to exit your business before you have even bought it, but we always recommend that you do. You never know what is around the next corner, and it’s best to develop your exit strategy as a franchisee before you invest. Will you sell or transfer the business? Are there any restrictions imposed by the franchisor? These are questions that you should have answers to before you commit to owning any business.
Are you ready to move from prospective franchisee to successful business owner?
Life as a franchisee can be hugely rewarding. To meet your expectations and achieve maximum reward, it is essential that you evaluate franchise opportunities comprehensively. The franchise you buy must be right for you and have a good outlook as a business.
To start your journey to life as a franchisee, book your free consultation with New Ground Consulting.