Every mature franchise system was once a start-up venture. An innovative concept, market conditions, a well-rounded management team, a carefully planned growth strategy, and sufficient expansion capital are paramount to a franchisor’s success.
If you are examining a franchise opportunity with less than ten franchised locations, here are some key areas to investigate before you make an investment decision:
Concept Uniqueness: A franchise concept that is too unique may not find a place in the competitive marketplace to garner the interest from the masses. Without mass interest, expansion may become limited to a defined geographical area, weakening the franchisor’s infrastructure.
Dissatisfaction Among Start-Up Franchisees: If you find that the start-up franchisees are expressing dissatisfaction with the franchisor, this may be an indication of a weak franchise system with little or no chance of growth. Start-up franchisees should be expressing heightened enthusiasm for the concept, encouraging prospects to invest in order to build the concept brand and its market presence.
Missing Legal Documentation: The franchisor should provide you with the UFOC and franchise agreement, which includes supporting financial and other disclosed information about the corporation. If these documents are not provided in a reasonable time frame, this may indicate lack of franchisor experience with industry laws and regulations.
Weak Financial Situation: A franchisor’s weak or unstable financial situation is not a positive sign since this may lead to future stresses on head office operations. Your accountant can advise on the franchisor’s level of financial resources and how this can impact your position as a franchisee.
No Professional Affiliation: If the franchisor has not joined an industry organization such as the IFA, CFA or other international organization, it is possible that the franchisor has been denied membership. Denial of membership is a strong indication that the franchisor does not meet the requirements to function as an industry representative.
High Pressure Sales Tactics: Any franchisor that tries to sell a franchise using high pressure sales tactics could be an indication that the corporation is experiencing insufficient cash flow or financial instability. If you experience aggressive selling behavior, move on to another opportunity immediately.
Willingness to Negotiate: If the franchisor is willing to negotiate the terms of the franchise agreement, take the offer with a grain of salt. Negotiating can have negative repercussions on the franchise system since it leads to an unfair advantage for future franchisees. A franchise organization can only succeed when it supports a consistent system of methods and operating standards.
