Want to Know Which Franchise is Right For You? Follow These 4 Essential Steps With so many franchise opportuntiies out there, learn how to narrow the field of prospective franchises to boost your chances of success.
By Mark Siebert
Key Takeaways
- Potential franchisees should begin by understanding their capital, risk tolerance, and leverage options.
- A comprehensive evaluation involves developing a shortlist of franchises, conducting in-depth research, and consulting various sources.
- Personal visits, discussions with current franchisees, and market analysis are essential steps to ensure the chosen franchise is a sound investment.
This story appears in the January 2019 issue of Entrepreneur. Subscribe »
When a couple I know, Mark and Andrea, decided to give franchising a try, they knew a few things for sure. First, they wanted something that made use of their experience working for Fortune 500 companies. They wanted something that wasn't a fad. They didn't want to make too large of an initial investment. And, finally, they wanted a company that took a unique approach in its marketplace — something that offered an established product in a new, more efficient way.
They spent months researching options, then zeroed in on a mobile flooring concept that ticked all their boxes. Before pulling the trigger, however, they spoke with more than 20 different franchisees to find out what it was really like being a part of the company. Only then did they buy in — and not surprisingly, their business succeeded.
As someone who deals with franchises all the time, I think they did everything right. But I'm surprised at how many people do it wrong.
Just like Mark and Andrea, once you've determined that franchising is for you, you should start by laying out the three most important facts: the amount of capital you have available to invest, your risk tolerance, and the amount of leverage (credit against your assets) you can and should get. Then, it's research time.
1. Develop your short list
Many potential franchise owners have no idea what industry they want to enter, let alone what business. That's why I suggest sketching out some broad outlines of the type of business or industry you'd like to enter. Also, ask yourself some basic, honest, personal questions, like, "Will I have fun doing this kind of business?" You'll need to love it; you're making a commitment that could last decades.
Once you do that, you can identify a list of all likely franchise contenders. Entrepreneur's franchise site is an excellent resource.
Use a successive series of filters to narrow your list to a handful — two dozen at most. Your first round of cuts must include an honest discussion with yourself about exactly what you're buying.
So, how do you know? Start by thinking about all the things you're really investing in. When you buy a franchise, you are not buying the chicken, the fancy new vending machine, the bagel oven, or the virtual reality game — you are investing in a business system. You are investing in the support of the franchisor's management team. Are those things a match for you?
2. Go deeper
Once you have determined that you do want to invest in a business system, you need to start researching potential franchises. And remember, the internet can never give you the same feel for a concept that you can get through more personal means.
Here are a few places you can consult:
- A franchise broker's entire job is to match potential franchisees with the right franchise. It sounds helpful and it can be. But, before you decide to work with a broker, you should understand how their business model works. First of all, a broker can go by many names. They often call themselves franchise consultants. They're also known as part of a lead-referral network, or LRN. These people may represent a hundred or more franchisors — but keep in mind that they typically only recommend franchises they directly work with, because that's who ultimately pays them.
- Consider attending franchise trade shows, and if you are looking in a specific field, attend industry shows. Franchise shows will give you an opportunity to speak with several hundred franchisors from a variety of industries in just a couple of days.
- Check out the brand's reputation. Don't just search for the companies by name. Also search for risk-related search terms like default rate, franchise failure, or litigation. While much of this information will be included in the franchisor's Franchise Disclosure Document (FDD), a legal document franchisors give to potential franchisees during the presale disclosure process, these searches might lead you to details that will not be found there. (But be careful: Blogs and review sites can be informative but may also contain incorrect information.)
- Your first (and hopefully best) source of information on a franchise company will be the franchise company itself. It will typically be able to provide you with a wealth of material, including its FDD, franchise brochures or other promotional materials, links to franchisee testimonials, and perhaps data on the industry in general. If you are interested in a particular franchise, reach out to it directly.
Related: From Coding to Creole Cooking — Here Are 5 Inspiring Success Stories of Black-Owned Franchises
3. Check out the competition
Once you really narrow the search to a few franchises, it's important to visit their competing businesses — both franchises and independents — in your community. Talk to competing franchisors so you can hear how they position themselves against your target franchise. If there are significant franchise competitors that have not yet entered your local market, do your homework on them as well. They may end up being your competition in a few years.
As a last step, consider working with a market analytics firm. These firms will, for a small fee, provide you with a market analysis of the demographics of the area and of the local competition.
Related: This Pizza Chain Will Pay You to Become a Small Business Owner — No Money or Experience Required
4. A final few
At this point, you may have a handful of companies you like — which means you're at risk of analysis paralysis. I see many potential franchisees freeze up here, unsure of which to pick. So to narrow your list further, you'll need to find additional reasons to filter companies out. Here are some to consider:
- Size of the franchisor
- Age of the franchise system
- Strength of the management team
- Financial strength of the franchisor
- Competitive nature of the market
Obviously, none of these filters come with right or wrong answers. Instead, they'll just help you identify the opportunity you're comfortable with. If, after you're done with this final screen, you still have several candidates, don't worry. What comes next is a numbers game: You need to do a deep dive into the final contenders' finances and operations. You'll learn a lot there and likely find the company that best matches your risk tolerance.
By this point in the process, all this rigorous preliminary legwork will really be paying off. You'll have a list of candidates that are truly likely to be the best fit for you. Your journey here is only beginning — but you've set yourself up for success
