- Franchisees should look for a supportive franchisor.
- Because owning a franchise is a long-term commitment, be sure to pursue a business that interests you in the long run.
- Ask specific questions about processes, ongoing support and terms of the deal to help you make your decision.
- This article is for entrepreneurs who are thinking about buying a franchise but are unsure which one may be right for them.
If you're looking to start a new business, franchising could be a good option. There are franchises in almost every industry, so you have a wide variety of options. So, how do you narrow it down and ultimately decide on the best one for you?
With a franchise, you get the benefit of a proven product or service while still being your own boss. However, you still must put in the effort, so it's important to find a good fit for your passion and skill set. There are many factors to consider, such as franchise costs and support offered by the corporate headquarters.
Top questions to ask when choosing a franchise
If you have no idea where to start, begin by asking yourself these questions, which will place some parameters on your franchise search:
What are my personal goals?
Everyone has different motivations for wanting to become an entrepreneur. First, ask 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 type of industry do I want to conduct business in?
Franchises aren't limited to fast food restaurants and coffee shops. This business structure exists in virtually every product or service category. You can operate a franchise in tutoring or college prep, janitorial or cleaning services, restaurants and retail, health and wellness, and many other categories.
What are my strengths?
The most successful franchise owners do the work that suits them and look for ways to delegate or outsource the functions that they may not be good at or have the time to do.
"Don't try to be an expert in everything," said Jamie Weeks, owner of more than 25 Orangetheory fitness studios, in an interview with Franchise Direct. "Find opportunities to outsource those functions that require expertise, to allow yourself to focus on your people.
"For example," Weeks continued, "I'm not an accountant or a bookkeeper, so I don't try to manage that on my own. Instead, I outsource to a company called Ceterus that specializes in outsourced bookkeeping and accounting for franchises."
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 do 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 kind of commitment do I want to make?
Many franchise agreements are multiyear contracts. While some are as short as five years or as long as 25 years, the average length of a franchise agreement is 10 years. This means you are committing to this opportunity for the long haul, as it can be difficult to exit a franchise agreement.
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 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."
Although some franchises want their franchisees to have industry experience, what's meaningful to them is for a franchisee to 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. Good-quality franchisees are hard to come by."
Key takeaway: Before diving into a franchise opportunity, ask yourself specific questions about your goals, strengths, desired business area, how involved you want to be in daily operations and how much money you're willing to invest in the opportunity.
What to look for when choosing a franchise
Once you've narrowed down the field and business model you're interested in, it's time to choose a specific franchise. Here are some factors to consider in your decision:
A strong support system for franchisees
One of the biggest benefits of buying into a franchise is that the brand is already established, so make sure the franchisor is available to guide you with efforts such as marketing.
"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," said Jeff Salter, CEO of Caring Senior Service.
Investment in your potential
Make sure you get the sense that the franchisor cares about your professional success and growth within the company.
"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," said Don Copus, franchisee at Hungry Howie's Pizza. "It was their interest in not just their personal, monetary gain but in my vision that incentivized me to work with Hungry Howie's."
The franchisor's professionalism
As you make your initial inquiries to the franchisor, take note of how they handle your request. Do they answer questions promptly and thoroughly? These initial first contacts are crucial to getting a sense of how the franchisor conducts business.
Bryan McGinness, CEO of WineStyles Tasting Station, said a potential franchisee should be 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]."
Sales and business approach
Ask what the franchise's sales approach is, whether there's enough available business in your marketplace and if you have enough money to wage successful campaigns, said Alan George, vice president of Franchise Marketing Systems. He also advised asking about their sales and advertising approaches, and whether they will work in your marketplace.
Be on the lookout for information on message boards, Facebook or LinkedIn groups, or articles where franchisees talk about their experience with the franchisor. If reviews are consistent or positive for the most part, you can get a good sense of the company's business practices.
Feedback from current franchisees
The best way to learn about a franchise is to talk directly to folks who work with them. Be sure to ask specific questions about the franchisor's support system, licensing fees and any exclusivity that the franchisor might offer within a certain ZIP code or radius from a certain location.
Discussions at official events
Some franchises hold a "discovery day" or similar events where you can speak to representatives and learn more about the opportunities available to you. Similarly, attending franchising industry conferences, such as the International Franchise Association's annual conference, is a great way to identify and compare your options.
Here are some other resources to help you select a franchise:
Key takeaway: Look for a franchisor that will be a true partner in supporting your growing franchise. Ask the franchisor representatives specific questions, and talk to current franchisees to get a sense of how a franchisor supports its partners.
What is a franchise disclosure document, and why is it important?
A franchise disclosure document (FDD) details the 23 obligations a franchisor has to a franchisee. By law, this document must be provided to franchisees before any money is exchanged.
Michael Daigle, a partner at franchise industry law firm Cheng Cohen, said both you and a legal or financial advisor should read the entire FDD thoroughly, paying close attention to the following sections:
Past or current litigation
Items 1-4 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 reveal 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 pay to the franchisor and its affiliates pre- and post-opening, as well as how much the franchisor relies on franchisees for revenue. Daigle said items 19 (financial performance representations) and 21 (historical growth and revenue sources) give you a glimpse of 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 said. "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 the good, the bad and the ugly."
Key takeaway: A franchise disclosure document is central to a franchising agreement, and you should consult an experienced franchise lawyer to review and advise on the provisions in this document.
What are the benefits of buying a franchise?
Buying a franchise cuts out some significant business development tasks that you would need to otherwise invest in if you were building a business from the ground up. This offers big advantages to those who don't have much experience launching a business. Here are some of the benefits:
You're buying into a proven business plan.
When you buy into a franchise, you'll likely receive a play-by-play manual on how to conduct each process needed to run the business. This can include everything from how to make the fries to how to wash the floors. This proven manual has already worked out the kinks you might have had to discover on your own if you were to start a brand-new business.
A lot of the marketing is done for you.
As a franchisee, you benefit from the name recognition that comes with licensing a regional, national or international brand. Additionally, some franchisors may supply additional funds for marketing activities or marketing materials, such as posters, that you can use.
Your supply chain and support systems are built out.
Your franchisor has already done the hard work of identifying reliable and cost-effective suppliers and service providers that make your business run.
Key takeaway: Buying a franchise cuts out much of the foundational work required of a new business, such as building a brand, developing a business plan and creating operating procedures.
Stella Morrison contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.