Franchisor Analysis

At this point, you might have a few franchises in mind. You've gone to the trade shows and determined your financial capability. You also have a better idea of what to look for in the FDD. Let's now take all the knowledge you've gained up to this point and start digging deep into the franchisors you're interested in. Are they really winning franchises?

Five Characteristics of a Winning Franchise

1. A product or service with a clear advantage over the competition.

The advantage may be in brand recognition, a unique, proprietary product, or 30 years of proven experience. Here are common questions you need to answer in assessing the value of the product/service you are interested in:

  • Is demand for the product strong and growing?
  • Is there heavy competition in the area you intend to operate?
  • Is the product unique or easily substitutable?
  • Is there an established market where you intend to operate or will you have to help generate initial interest?
  • What are the profit margins like in this industry?

The most attractive franchises are successful because of standardized operations, brand recognition and efficiencies of scale. Fast food is just one example. On the other hand, many franchises such as the copy shop or convenience store may not offer you more benefits than if you had chosen to set up your own business in the first place. You could probably be more sensitive to local market needs and run your business more profitably than if you had to follow a set of generic rules put upon you by a franchisor who eats away at your profits as well through royalties.

Find a product/service that you feel definitely provides you with clear advantages that are worth the franchise fees!

2. A standardized franchise system that has been time-tested.

Look for a company in which most of the bugs in the system have been worked out through the cumulative experience of both company-owned and franchised units. By the time a system has 30 or more operating units, it should be thoroughly tested.

3. Exceptional franchisor support.

The U.S. Small Business Administration Franchising Handbook mentions the following features of solid franchisor support system:

  • A federally registered trademark or service mark, and a state registered trade name.
  • A reliable, affordable product or service.
  • The strength of a network of independently owned and operated franchises adding strength to and gaining support from each other.
  • A complete training program for both the franchisee and the franchisee's staff. Training should provide hands-on experience in every aspect of the operation.
  • A detailed and readable operations manual, which provides the franchisee with an approach through start-up and well into successful operations.
  • Support from the franchisor and staff, on everything from site selection to decor, inventory and grand opening.
  • Managerial assistance and assistance in operations and accounting procedures.
  • Marketing, merchandising, and advertising support.
  • Monthly newsletters on the company and the industry.
  • Potential for multi-store or territorial expansion.
  • A continuing program of new product development and testing.
  • Purchasing benefits, buying products in volume, and passing the cost savings onto franchisees.

4. The management experience necessary to guide the company's growth without short-changing its franchisees.

Sufficient depth of management is often lacking in high-growth franchises. Use the meeting with the franchisor as a time to ask questions. Visit the home office to get a feel for the people you will be dealing with.

5. A strong mutuality of interest between franchisor and franchisees.

Unless both parties realize that their relationship is one of long-term partners, it is unlikely that the system will ever achieve its full potential. Current franchisees are sources of meaningful information in evaluating the franchisor-franchisee relationship. For systems with under 25 units, talk to all franchisees. For those having between 25 and 100 units, talk to at least half. And for all others, interview a minimum of 50. The names and addresses of those in your state will be listed in the FDD.

Be especially suspicious of franchises that promise big profits for little work and offer a money-back guarantee. Rarely do you get something for nothing in this world and almost never do you get your money back when business deals go awry.

Franchisor Analysis Worksheet

The Minority Business Development Agency (MBDA) provides an excellent worksheet for you to analyze every franchisor you are considering. It brings together all the concepts you have learned up to this point.

Part I of the form compiles all the information found in the FDD. Here, you fill in information regarding the franchisor's business background and reputation, the state of financial health the company is in, and the various forms of corporate assistance that the franchisor is obligated to provide you.

Part II determines how well you interact with the franchisor, since this relationship is the very foundation upon which your business will operate. If the franchisor is insensitive to you prior to signing an agreement, you can assume that their behavior will not change later and may even get worse. The worksheet provides a scorecard. Any franchisor that ranks below a ā€œCā€ should be eliminated from your consideration.

Part III provides you with 22 questions to ask a franchisee. By talking to franchisees, you can cross-check the information given to you by the franchisor.

Next: New vs. Existing Franchises