Introduction
A franchise is a business model where a franchisor licenses certain trademarks, procedures, and proprietary knowledge to franchisees. Franchisees are independent business owners that pay an initial franchise fee and ongoing royalties to the franchisor in exchange for the right to use the franchisor’s name, system, and brand. Franchising has become a huge business, with more than 780,000 franchise establishments in the United States alone. Franchising offers opportunities for both entrepreneurs seeking to open their own businesses, as well as established companies looking to expand using a proven business model. Before investing in a franchise, it is important to thoroughly research the opportunity to determine if it is a good fit. This research paper will explore factors to consider when researching franchise opportunities and provide guidance on the research process.
Research Factors to Consider
When researching franchise opportunities, there are several important factors to consider:
Industry and Market – Evaluate the industry the franchise operates in and analyze market trends, demand drivers, competitive landscape, and growth potential. Some industries are more stable and recession-proof than others. Consider factors like industry regulations, brand awareness, and customer loyalty.
Franchisor History and Experience – Research how long the franchisor has been in business, number of existing franchisees, annual franchise sales, and past performance. An established franchisor with a proven system is usually a safer bet than a start-up. Check with regulatory agencies for any issues.
Initial Investment – The initial franchise fee can range greatly depending on the franchise. Research the complete startup costs, which also include real estate, equipment, inventory, deposits, working capital, and ongoing recurring expenses. Have sufficient capital to withstand losses during startup.
Ongoing Royalties and Fees – Understand all ongoing monthly/annual royalties and advertising fees. Royalties are typically a percentage of gross sales. Fees go towards supporting the brand through marketing, operations manuals, training etc.
Financing Assistance – Inquire about SBA franchise loan programs as well as internal financing programs some franchisors offer to qualified candidates. Having access to startup capital can make or break the venture.
Franchise Unit Performance – Request financial performance representations from existing franchisees and franchisor. But be aware these may not reflect your actual performance which depends on your local market and management skills.
Support and Training – The strength of the franchising system lies in ongoing support. Evaluate training programs, operations manuals, field supervision and quality controls. Continued support is crucial for long term success.
Franchisee Agreement Terms – Thoroughly review and understand the franchise agreement, including length of contract, protected/unprotected territories, renewal process, transferability rights, and termination clauses. Engage legal counsel to assist.
Personal Assessment – Researching the franchise opportunity is only half the task. Candidates must honestly assess if they have the required skills, passion, time commitment and resources to succeed as a small business owner. Operating a franchise requires hard work and long hours.
Research Sources and Steps
There are number of credible sources franchise candidates should utilize for comprehensive research:
Franchisor Website/Materials – Provides an overview and basic information but can be biased. Independently verify claims with other sources.
Franchise Disclosure Document (FDD) – The legal disclosure that lists 23 data items including litigation, bankruptcies, franchisee demographics, financials etc. Review thoroughly before signing anything.
Franchisee Interviews – Reach out to existing franchisees through franchisor contacts or online directories. Ask about training, issues, profitability, challenges and advice. Consider visiting operational locations.
Franchising Industry Associations – Sites like Entrepreneur, Franchise Times and IFA offer industry news, rankings and discussion forums to vet franchisors.
Regulatory Agencies – Check websites of regulatory bodies like FTC and relevant State agencies for franchise-related complaints, actions and resolutions.
Public Records Search – Use tools like corporationwiki.com or hoovers.com for background checks on franchisors, litigation records, press mentions etc.
Accountants/Lawyers – Consult credentialed accountants and franchise lawyers to review documents/proposals and ensure full understanding of financial and legal obligations.
Some additional recommended research steps include doing mock franchising projects to understand day-to-day operations, creating proforma financial projections to evaluate sustainability, interviewing franchise transfers/former franchisees and cold calling other franchisees for verification. Taking 6-12 months for thorough due diligence on the right opportunity is ideal before investing one’s savings.
Conclusion
franchise investment requires extensive pre-purchase research from multiple credible sources beyond relying on promotional franchisor materials alone. Carefully evaluating key factors like industry feasibility, franchise system strengths, initial costs, ongoing expenses, franchisee experiences and personal fit help ascertain viability and uncover potential issues. Engaging accounting and legal support ensures full comprehension of financial commitments and contractual obligations. Taking sufficient time for comprehensive due diligence through objective fact-finding and independent verification minimizes risk in what is still inherently a small business investment. With thorough research, the right franchise opportunity can provide a tested business model for future entrepreneurial success.
Andrew Stroud