How to Evaluate a Franchise from the Right Perspective

As I mentioned a couple of weeks ago, I believe franchising has a key advantage over traditional entrepreneurship. With franchising, you don’t have to figure out a business from the ground up. Instead, you purchase an established business system that has already been tested and optimized by both the franchisor and early franchisees. This does not mean, however, that you should just buy any franchise that strikes your fancy. Some franchisors have done a better job than others of developing a solid product or service and the business plan to go with it. For this reason, how to evaluate a franchise is a key skill for potential franchisees to learn.

Many potential franchise owners approach franchises from a consumer perspective. If a product or service appeals to them, they assume the franchise will be a good choice. It’s a good idea to evaluate a franchise from the consumer perspective. After all, if consumers don’t like the product or service, they won’t spend their money with you. But you must remember that you are not deciding whether to become a customer of the franchise–you are deciding whether to become an owner. And that is a completely different proposition.

As a potential owner, you also need to determine whether the franchise is a solid investment. Will the money and time you put into it generate the return you hope to achieve? Will you be able to reach your professional and life goals through this business? In other words, you need to evaluate franchises from both perspectives: consumer and investor. The best franchises will pass both tests with flying colors.

How to Evaluate a Franchise as a Consumer

When you’re evaluating a franchise as a consumer, start with a gut check. Without thinking too much about it, ask yourself if you would buy their product or service. Does it meet a real need? Does it seem interesting, useful, or fun? Is the price too high for your taste–or so low that you’re suspicious about quality?

Next, ask a trusted friend or family member to do the same gut check. Try to find someone who matches the franchise’s most obvious target demographic or who has expert knowledge. For instance, if you’re considering a tutoring franchise, talk to a parent of school-aged children or to a teacher at your child’s school.

Next, shop the franchise. Buy their product or service, from multiple locations if possible. Depending on the franchise you’re considering, this might be a built-in part of the official vetting process, or you might have to do it on your own. Ask yourself the following questions:

• Did the product or service live up to the marketing, or do I feel disappointed?
• Do I feel like I got my money’s worth?
• Were the employees courteous and competent?
• Was the business orderly and organized, or did employees seem harried and unsure what to do?
• Did I have a consistent experience between locations?

If you answer “no” to any of these questions, proceed with caution. There may be good reasons for it, but it could also mean the franchise will struggle to attract or retain customers.

How to Evaluate a Franchise as an Investor

While you should definitely consider whether a franchise has what it takes to appeal to consumers, your personal role is different. You’re going to invest time, money, and expertise in the business. It will be a crucial part (if not the only part) of your retirement plan. So when you think about how to evaluate a franchise, you need to think about evaluating it as an investor.

While a consumer cares about the product or service and the brand experience, an investor cares about what happens behind the curtain. You must make sure the franchise has a solid business system with long-term sustainability. When evaluating a franchise from the investor perspective, ask questions such as:

• Has the franchisor been around and been profitable for a while, or are they just getting started?
• Does the franchisor’s leadership team consist of experienced business leaders, or is this the first time they’ve led a company? If they’ve never worked in franchising, do they have proven success in a related business or role?
• Is the franchisor in a good financial position? Does the company have any major financial issues in its past?
• Do the unit financials (the financial details for individual franchises) look good? Are franchise/marketing fees, startup costs, ongoing costs, and margins reasonable and sustainable?
• Does the franchisor have a low turnover rate, or does it regularly lose large numbers of franchisees?
• Do the individual franchises’ territories seem to be the right size, or do they compete heavily with each other for customers?

You should also evaluate whether the franchise suits your particular comfort level, skills, and circumstances. Ask questions such as:

• Is this franchise a good match for my leadership style, or for my level of business knowledge?
• Do I feel like I can understand and follow the business plan, or is it overly complicated, opaque, or lacking important details?
• How long does it take the average franchisee to recoup their initial investment and become profitable? Does that timeline fit with my professional, financial, and life goals?
• Does the franchisor provide sufficient support to help ensure franchisees’ success?
• Do I feel like the leadership and franchisees are transparent and trustworthy?
• If I want to expand, how easy will it be?

Keep in mind that you probably won’t be able to answer most of these questions until you’re in the due diligence stage of the research process. Until that point, the franchisor isn’t required to disclose financial or other proprietary information. And keep in mind that, while you’re evaluating the franchisor, they should be working just as hard to evaluate you. A franchisor that takes your money without asking any questions is either on the verge of failing or not actually a franchisor at all.

If you’re not sure how to evaluate a franchise on your own, I’m here to help. Schedule a call with me to start the process of reviewing your options. It only takes 15 minutes, and my services are always free!