Franchises are appealing to new entrepreneurs who want the reduced risk of a proven product or service while still being their own boss. They can get support from the parent company or fellow franchisees to ensure success. The hardest decision, though, is which franchise to join. How do you choose?
Even if you have a general idea of the industry you want to work in, there are numerous options in a variety of price ranges within each industry, leaving you the task of sifting through dozens of websites and information packets to find the one that's right for you. Business News Daily spoke with franchise industry experts and franchisees to aid you in the process of selecting a franchise to buy.
Questions to ask yourself
If you have no idea where to start, you'll want to begin by asking yourself a few broad questions that will place some parameters on your franchise search.
What are my personal goals?
Everyone has different motivations for wanting to become an entrepreneur. First, start off by asking yourself what your goals are, said Dan Martin, president and CEO of franchise consulting firm IFX. Do you want to make money, spend more time at home or take an entrepreneurial step in your career?
"By figuring out your actual goals, you will be able to determine what franchise is a good fit to help you meet those goals," Martin said.
What role do I want to play in the business?
There are two types of franchisees: Absentee owners, who hire staff to manage the business on a day-to-day basis, and owner/operators, who are directly involved in running the business.
"Many franchisors offer a hands-on opportunity, [whereas] others offer more of a management opportunity," said Rhoda Olsen, CEO of Great Clips hair salon franchise. "The key question [franchisees] need to ask themselves is what they see themselves doing on a day-to-day basis. Do they really want to do a specific job every day? Do they want to lead an organization? Do they want to manage managers?"
What is my investment budget?
Franchise costs vary greatly, depending on the industry and specific business model. While some upfront fees are less than $10,000, others can be upward of $1 million. Terry Powell, founder and CEO of franchise business coaching company The Entrepreneur's Source, said prospective franchisees should weigh the initial investment against their expected return, along with their income, lifestyle, wealth and equity (ILWE) goals.
"Opening a food franchise will have a much higher investment than a home-based, business-to-business franchise, simply due to the amount of equipment and inventory necessary to start the business," Powell said. "It's up to the prospective franchisee to decide how much they would like to invest and what will help them achieve their goals, both short- and long-term." [See Related Story: 40+ Franchises for Every Budget]
Do I have basic business skills?
Although some franchises do want their franchisees to have industry experience, what's more important to them is that a franchisee have the basic business know-how and entrepreneurial drive to succeed.
"We want franchisees who understand the art of marketing and the need for sales" [rather than experience in our particular industry]," said Tom Wood, president and CEO of the Floor Coverings International franchise. "We want franchisees who are focused on customer service and ways to increase transactions," he added. "Good-quality franchisees are hard to come by."
What to look for
Once you've narrowed down the field and business model you're interested in, it's time to choose a specific franchise. To help you narrow down your list, our sources advised looking for the following attributes in a company.
A strong support system for franchisees. "Since you are buying into an established brand that works best when the model is followed, there should be ample support through every stage of your franchise, since they should know how to guide you." – Jeff Salter, CEO, Caring Senior Service
A great corporate staff. "[Ask yourself], 'How is it to work for the franchise owners? What kind of people are they?' It's important for franchisees to meet ... the corporate staff. That face-to-face interaction is huge. You have to have a connection." – Andrea McGinness, chief operating officer, WineStyles Tasting Station franchise
Investment in your potential. "When interviewing with Hungry Howie's Pizza, I participated in a series of tests to determine if I was entrepreneurial-minded and if I had the ambition to grow with the company. It was their interest in not just their personal, monetary gain, but in my vision that incentivized me to work with Hungry Howie's." – Don Copus, franchisee, Hungry Howie's Pizza
Reviewing the FDD
Michael Daigle, a partner at franchise industry law firm Cheng Cohen, said both you and a legal and/or financial adviser should read the entire franchise disclosure document (FDD) thoroughly, and pay close attention to the following sections:
Past or current litigation. Items 1 through 4 of the FDD will tell you all about the franchisor's experience and whether the franchisor or any of the people in charge have been involved in bankruptcies or litigation relevant to the brand or their experience as a franchisor. Existing and historical litigation between the franchisor and its franchisees might show a level of dissatisfaction with the system, or it might show that the franchisor is serious about upholding its system standards for the benefit of all franchisees, Daigle said.
Payments and revenue model. The FDD also explains what you'll be paying to the franchisor and its affiliates pre- and post-opening, as well as how much the franchisor relies on franchisees for revenue. Daigle said that items 19 (financial performance representations) and 21 (historical growth and revenue sources) give you a glimpse into how well the units are doing financially.
Turnover and resource strain. Item 20 of the FDD provides a list of currently operating franchisees and a list of franchisees who have exited the system or stopped communicating with the franchisor. You should contact as many current and former franchisees as you can and ask questions about their experiences, struggles and profitability, Daigle said. "Look behind the curtain and the sales pitch," Daigle told Business News Daily. "Don't be afraid to ask the hard questions — in fact, ask the same question of different people to see if you get consistent answers. Talk to as many franchisees as physically possible, and don't stop until you've heard at least some of each of the good, the bad and the ugly."
What to ask the franchisor
Alan George, vice president of Franchise Marketing Systems, recommended taking some time to ask specific questions of the parent company that may or may not be covered in the FDD. For instance, ask what its sales approach is, whether there's enough available business in your marketplace and if you have enough money to wage successful campaigns. He also advised asking about their sales and advertising approaches, and whether they will work in your marketplace.
Bryan McGinness, CEO of WineStyles Tasting Station, added that a potential franchisee should be very clear on what the franchisor expects of him or her, and vice versa.
"Make sure it's a good fit for both parties," McGinness said. "It's easy to sign franchisees and take their royalty money. What happens after is what matters. Make this a long-term partnership and a win-win [situation]."
For more info to help you decide which franchise to invest in, visit the following resources:
- American Association of Franchisees & Dealers
- International Franchise Association
- The Wall Street Journal
Additional reporting by Nicole Taylor and Kim Ann Zimmerman. Some source interviews were conducted for a previous version of this article.