Considering buying a franchise? If so, you probably have worries about what could go wrong.
That’s smart; this is a major purchase, and you should do your research and make sure you know everything you can about the franchise company and brand you’ve chosen.
Too many franchise owners buy on gut instinct — you loved their ice cream, or that tutoring service helped your kid get better grades. Next thing you know, you’ve signed on the dotted line and own a franchise.
Then you open the doors … and get some surprises.
It doesn’t have to go that way. Every franchise company has a public document known as a Franchise Disclosure Document (FDD), but many franchisees never read it. It contains a wealth of information about the health of the franchise system. What the FDD doesn’t answer you can learn from talking to current and former franchise owners.
What A-bombs might be hidden beneath the happy talk a franchise’s owners lay on you? Here are the top five things you’ll want to look out for before you sign up with a franchise.
1. The Model Is Failing
How well is this chain doing, overall? Your best success odds lie in joining a chain where the model has been proven, and per-unit revenue is growing. The FDD gives you many clues about the health of a franchise system.
For instance, you’ll be able to see how many units closed in recent years. Ideally, there aren’t any, as thriving units could be resold to new owners if the existing franchisee wants out. Many closures is a major red flag.
Also, check for lawsuits and read up on any you find. They may be frivolous, or they may reveal major problems that could affect your business.
2. Your Market Is Oversaturated Or Not A Fit For The Brand
Sometimes, a franchise chain can be doing great, but it’s still not going to be a good investment for your particular situation. Be sure to look at all the competitors in your market for your type of business, including other units of the brand you like. How many locations are already open in town, and how many more are planned?
Sometimes, initial success will have franchisors expanding over-aggressively into a market, or that success attracts new competitors. The classic example is the McDonald’s owner who sees a Burger King or Wendy’s open on their same corner. Soon, per-unit income is falling.
Franchise owners love to show off their most successful units. Remember, your situation may be different than theirs. For instance, frozen yogurt and ice cream franchisees in northern cities may get excited by big, year-round numbers franchisees post in southern locales, but could discover their own unit’s sales are highly seasonal.
3. Franchisees Aren’t Valued
Talking to individual franchise owners can reveal an undercurrent of discontent with management’s rules. Be sure to select some owners at random, not just the names the franchisor handpicked for you. This is how you learn what’s really going on. For instance, headquarters may tell you its expensive new format is doubling sales, but franchise owners who paid to implement it may say different.
In successful chains, franchisees are valued and their suggestions are often implemented chainwide. Ignored franchise owners often band together to try to get their concerns heard, so check for franchisee owner organizations.
4. You Hate The Day-To-Day
A franchise concept can sound great on paper — until you try to run that business. Seek out a chance to job-shadow an existing owner in your chain and learn what their daily life is like.
What the owner does varies widely in different franchise types. You might be standing on your feet 10 hours a day, supervising a crew of workers, or you might be driving around all day, making sales calls to drum up business. You’ll want to choose a franchise that’s a fit for the type of business activities you enjoy.
Many new owners fantasize they’ll be hands-off with the business and the profits will just roll in. Understand that’s unlikely, especially in the first couple of years. Remember, workers generally do what you inspect, not what you expect.
5. You Feel Suffocated By The Rules
You know you’re buying a done-for-you system when you buy a franchise. But how rigid the rules are can vary. In some franchise systems, you’ll be compelled to use the national advertising campaign, even if you feel it’s not a fit for your local audience. Or you might have to buy all your supplies from the franchisor, down to the napkins.
If you’re an entrepreneurial, creative type, this may be too much of a straitjacket for your management style. You might want to seek out a franchise that values franchisee innovation and is more flexible about how you execute their concept.
Do Your Homework Before You Buy A Franchise
There’s a lot to know about a franchise if you want to select the best opportunity for your needs. With well over a thousand brands now selling franchise units, it can be boggling to compare offers and figure out the best choice.
That’s why many entrepreneurs work with a franchise consultant before they make a purchase. Consultants are familiar with hundreds of the top franchise brands and can help you understand the differences in competing models.
However you research a franchise offer, the bottom line is to learn all you can. Leave no stone unturned before you make a decision, and you won’t get ugly surprises once your franchise opens its doors.