Potential entrepreneurs who want the independence of running their own business without the hassle and risk of building their own original idea from the ground up often choose to become franchisees. A proven model and the support of a parent company give franchise businesses an edge over new startups, so it's not hard to see why this option is so appealing.
The hard part, of course, is choosing which franchise to invest in. Even if you have a general idea of the industry you want to work in — food service, health care or something else — there are countless options at different price points within each one, 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 veterans, franchisees and business experts to aid you in the process of selecting a franchise to buy. [Franchises for Every Budget]
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. Depending on your goals, different franchises can offer you different results, said Dan Martin, president and CEO of franchise consulting firm IFX.
"Is your goal to make money, spend more time at home or take an entrepreneurial step in your career?" Martin said. "By figuring out your actual goals, you will be able to determine what franchise is a good fit to help you meet those goals."
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. It's important to find a franchise model that fits the role you want to have, said Rhoda Olsen, CEO of Great Clips hair salon franchise.
"Many franchisors offer a hands-on opportunity, [while] others offer more of a management opportunity," Olsen said. "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 cost 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."
Once you know your budget, you have to be sure that you're comfortable with the potential investment you'd be making. Most experts recommend having at least six months' worth of capital for living expenses and overhead costs, on top of the initial franchise fees, before starting up.
"If you have to stretch too much, it could easily lead to bad decision making down the road," said Ray Barton, chairman of Great Clips. "This isn't one of those lessons you want to learn the hard way. Avoid the stress [of] getting in too deep financially."
Do I have basic business skills? While 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 flooring industry experience]," said Tom Wood, president and chief executive officer of the Floor Coverings International franchise. We want franchisees who are focused on customer service and ways to increase transactions. Good-quality franchisees are hard to come by."
For this reason, Powell noted that potential franchisees should enter their search with an open mind — in other words, don't only search for franchisors in industries in which you have prior experience.
"The systems and processes put in place by the franchisor should set a franchisee up for success, regardless of their past experience in the field," he said.
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.
They stay on top of trends in offerings and operations. "Franchises that invest in developing new technologies, such as loyalty apps, will not only increase ticket totals for their franchisees but also create smoother and more efficient operations." —Jitendra Gupta, founder, Punchh
They offer 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
They have 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, COO, WineStyles Tasting Station franchise
They're invested 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
They're selective about their franchise partners. "Candidates should look for companies that truly invest in their franchisees and carefully select who they allow to become franchise partners. Although a franchisor could accept everyone, franchises that are selective and vet quality franchisees to carry their brand vision are better-suited for long-term stability." — Barry Nelson, vice president of operations, Pancheros Mexican Grill
Reviewing the FDD
Before you make a commitment to any franchise, you'll be expected to review its franchise disclosure document (FDD), which provides information about the franchisor, current franchisees' activities and your obligations as a franchisee. Michael Daigle, a partner at franchise industry law firm Cheng Cohen, said that both you and a legal and/or financial adviser should read the entire 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 are or 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 discord in or dissatisfaction with the system, Daigle said — or it might show that the franchisor is serious about upholding its system standards for the benefit of all franchisees.
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. Depending on your particular business, this information could be invaluable to the development of your own business plan, and in determining whether or not the franchisor's model is worth investing in.
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. High turnover rates could indicate issues with management or infrastructure.
"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, such as 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. [Figure out] how to make this a long-term partnership and a win-win [situation]."
For more help deciding which franchise to invest in, visit the following resources:
- American Association of Franchisees & Dealers
- International Franchise Association
- "How to Select a Franchise" (The Wall Street Journal)
Additional reporting by Business News Daily contributor Kim Ann Zimmerman and social media specialist Dave Mielach.
Correction: An earlier version of this article misidentified the titles of Bryan and Andrea McGinness.