Three Key Questions You Need To Ask Before Evaluating Any Franchise Business
If you’re anything like me, you get excited by new and interesting ideas. I’m the type that sees what is possible. Entrepreneurship requires that kind of optimistic enthusiasm, but it can be a double-edged sword.
While it can be an important motivator, it doesn’t always lead to good financial decisions.
F. Scott Fitzgerald once remarked that “The test of a first- rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
This ability is particularly important when it comes to evaluating any business opportunity. You must simultaneously look for reasons to move forward with the business while seeking out compelling reasons not to.
I’ve been thinking a lot about this lately, particularly in the context of franchising. About a month ago, Forbes launched their annual “Best and Worst Franchises In America” feature, which coincided with the release of my latest book, “The Enlightened Franchisee” (which you can get for free here).
Franchising can be such a “sales-y” process that buyers are often discouraged from asking the tough questions. This is as unfortunate as it is unproductive.
Before you put your hard-earned money at stake, you can and should gather all of the information you need to make the best decision possible.
Here are a few key questions that you should ask before diving too deep into the evaluation of any franchise business.
Does the brand have a track record?
The first and perhaps most obvious question to ask when evaluating a potential franchise concept is, “Does this brand have a track record of success?” As with most things in life, however, the answer isn’t as clear as you may expect.
For every well-known franchise brand out there – think Subway, Midas, McDonalds, etc. – there are countless lesser-known brands vying for your attention and checkbook.
These lesser-known brands are often referred to as “emerging brands,” and, as the name suggests, often lack the track record of their larger, more established brethren.
It’s important to understand that when it comes to emerging brand opportunities, flexibility and risk often go hand.
The less established the brand, the more opportunity exists to play a role in shaping its future. On the other hand, you potentially take on significantly more risk.
I often advise candidates to meditate on this tradeoff and evaluate it in the context of their personal ambitions.
If you choose to act as a pioneer and pursue a lesser-known brand that offers more flexibility and opportunity, it’s important to really dive into the performance of the corporate-owned stores they’re currently operating.
Specifically, you want to ask the following questions:
- How well-documented are the internal processes and other matters of intellectual property?
- Are they committed to the franchise model in the long-term?
- Do you share the owner’s vision for the business?
- Do they have a reasonable and robust marketing plan for their franchise locations?
- Are the corporate stores profitable to such an extent that they could support a hypothetical royalty?
What do existing franchisees have to say?
The best way to get the inside scoop on a particular brand is to talk to their existing franchisees. This process is called validation, and it’s a critical part of any due diligence process.
Typically, franchisors will provide contact information for a select number of existing franchisees for you to speak to. This approach lends itself to potential cherry-picking on the part of the franchisor, which could of course skew feedback you receive.
A better way to move forward is to lead your own validation process by searching for franchise locations and randomly calling them. It may prove to be a bit more work, but you’re more likely to get honest feedback that way.
I recommend that candidates take an information and conversational approach when talking to franchisees. The goal isn’t to interrogate them, but rather to get an accurate idea of “a day in the life.” It’s important to take a holistic view of the feedback they offer.
Remember, every franchisee will have things they like about the system and things they don’t like. It takes both wisdom and experience to separate the valid complaints from your run-of-the-mill sour grapes.
This is where having a trusted advisor can come in handy. Whether you’re working with a franchise consultant or have someone whose counsel you respect, it’s important to have someone you can bounce the feedback off of and piece together an accurate picture of what is going on.
Do you trust the founder/CEO?
Nothing matters more in any business relationship than mutual trust, respect, and admiration. When you buy a franchise, you’re really buying into the founder’s vision. Your ability to work well with that individual is probably the single most important determinant of success.
It’s difficult to get to know someone in that capacity, especially when you’re engaged in a formal sales process. I liken the experience to a job interview. Everyone is on their best behavior, so it can be challenging to dig past the surface and learn what makes a person tick.
Ultimately, I’ve learned that the best way to figure out if the founder or CEO of a concept is trustworthy is to pay attention to their reputation in the industry. It’s a tight-knit world, and word of a bad actor travels fast. Pay attention to what others say, because in this industry, where there is smoke there is often fire.
At the end of the day, all of these questions must be considered holistically. Remember that franchises are a lot like people; they’re multi-dimensional, flawed, and have potential all their own.
Just as you usually can’t judge a person based on one aspect of their personality, you can’t judge a franchise on just one aspect of their story.
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