How Do You Investigate a Franchise?

Like starting any business, buying a franchise involves a risk. Studies show that successful franchisees: 

  • conduct their own marketing research 
  • use their own financial and legal advisors 
  • develop thorough marketing and business plans 
  • have prior work experience in the industry  

Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating the strength of the franchisors. 

 

Find Out What Franchises Are Available

Read Directories:  

  • The Franchise Opportunities Guide 
  • The Executives' Guide to Franchise Opportunities  
  • The Franchise Annual  
  • Franchise Handbook  
  • How Much Can I Make?  

Read Articles and Ads in Business Publications:  

Attend Trade Shows and Expositions: 

  • IFE (International Franchise Expo) is sponsored by the International Franchise Association (IFA: 202-628-8000 or www.franchise.org) and is the world's largest gathering of franchise companies.   
  • The U.S. Small Business Administration and Small Business Development Centers (SBA:www.sba.gov)   

Research the Internet:

                                                    

Evaluate the Strength of the Franchisor

Investigate the Franchisor’s History:  

  • How long has the franchisor been in business? 
  • How many current franchisees are there? 
  • What is the failure rate of the franchisees? 
  • Are there any pending or past lawsuits and what have they been for? 
  • Does the franchisor have a reputation for quality products or services?  
  • What is the franchisor's financial health? (get its Dun & Bradstreet rating)
    • credit rating 
    • profitability 
    • reputation 

 

  • what are the financial performance representatives?  
  • On what are they based?  
  • Are the projections based on franchisor or franchisee-run centers?  
  • How long have the centers used for projections been in business?  
  • what is the background of the principals/management? 
    • What is their business experience?  
    • Have they personally had any bankruptcies? 
    • Have they personally had any recent litigation? 

 

Obtain Professional Advice Concerning the Franchisor’s FDD and Franchise Agreement: 

  • Paying special attention to:  
  • costs 
  • agreement life and renewal provisions and conditions 
  • termination clauses 
  • franchise territory (if any) 
  • procedures and restrictions 
  • training and assistance 
  • financial performance potential - gross sales, net profit.   

 

  • Expansion plans:  
  • How fast do they plan to grow?  
  • Where do they plan to grow? 
  • Do they have a business plan for your area or location?  
  • What is their analysis of the competition in your area? 
  • How many units are being planned for your area? 
  • How much is going to be spent in regional advertising in your area?  

 

Seek the advice of an attorney and accountant who specialize in franchises. 

 

Talk with Existing Franchisees, Emphasizing the:

  • level of training  
  • quality of products or service 
  • level and promptness of support  
  • operations and quality of the operations manuals 
  • financial performance history/claims 
  • any problems or difficulties with the franchisor 

Visit with Existing Franchisees 

  • Visit/talk with franchisees who have left the system and find out why they left. 
  • Visit the franchisor's headquarters:
    • meet the support team 
    • review the operations manuals and see if you can sit in on a training class.  

 

Work in an Existing Franchise 

Get to know the system, manuals, training program, support, earning potential, etc.