You've made the decision to pursue a franchise opportunity but you've yet to decide on which franchise concept is best for you. Before you begin the enquiry and application process, use these guidelines to help you make a diligent assessment of the franchise system.
1. How Well-Known is the Franchise System?
If you are investing in a new franchise system (one that has been in operation for less than five years or has less than twenty outlets) you have to consider that the business you are buying may not be that well-known yet to give you the edge over your competition. Buying into a new concept doesn’t mean you’re making a bad investment; it just means that at the onset, you may not gain the same advantages as those built into a mature franchise concept such as consumer brand awareness. 2. Examine the Franchisor’s Management Team and History
The UFOC should provide some information about who the key players are in the franchisor’s management team. You may not get access to their resumes but you should enquire to their work experience – and more importantly, their franchising experience. Are they members of certain organizations? What have they done in the past? The UFOC should disclose any lawsuits or pending convictions. Get to know the franchisor as thoroughly as possible. Don’t shy away from intrusive questions.3. What is the Financial Strength of the Company
If the franchisor is growing the franchise system with the influx of new franchisees and has no working capital or investment backing, this may be a sign of trouble. Here is where your accountant’s feedback is king: by reviewing the financial statements of the company, he or she can tell you how financially stable the system is. Without this financial security, how can the franchisor sustain operations and worse yet, how can the system possibly expand? 4. Is the Franchise Concept in Demand and Growing or is it a Fad?
An easy way to address this question is to do a concept search on many of the franchise directories available online. Market research is another approach. Stay on top of the industry in question and review some of its own trade magazines or journals. If the concept has been in operation for many years but it is one of few in the marketplace, this may be an indication that it is not a fad. Is the concept so unique that people may get tired of it before it has a chance to take off?5. Has the Franchisor Registered a Trademark and Sought Brand Protection?
The franchisor’s trademark is the most important level of protection that makes the concept uniquely distinguished from others in the industry or marketplace. A franchise system could have a number of “marks” such as logos, names, slogans, products, designs or a combination of these. These system “identifiers” have to be registered with the
United States Patent and Trademark Office to gain protection from third party use or abuse.
6. How Does the Franchisor Choose Franchisees?
The Franchisor should have a system in place for selecting candidates. Of course, not every applicant is granted a franchise but what are the primary motivators? Net worth? Previous experience? Weight of the application? What do you think the franchisor saw in you that sets the bar for future franchisees? A franchisor should not be motivated to sign on franchisees simply because they are lining up to buy franchises. To be granted a franchise means a franchisor’s investment in you.7. How Many Stores Have Closed? Where? Why?
The UFOC should contain a schedule that lists the names and locations of franchises that have closed over a certain time frame and the stores that have changed hands as well. Where have franchises closed? What are the reasons for the closures and terminations? A franchise closure has more negative impact than one changing hands but both need to be explored. Too many closures and/or terminations can signify an underlying problem or issue regarding the franchisor’s reputation.
