Franchise development offers an excellent opportunity to begin a new business without experiencing the same level of uncertainty as with most start-ups.
In a franchise business, so many elements are already optimized for your benefit: brand recognition, marketing strategies, proven systems, and established products.
However, choosing a franchise is a significant undertaking, especially if you are new to franchise ownership. To navigate the sea of franchise opportunities and find the right franchise for your goals, you need a structured approach.
Good news: while no one can guarantee success, following a proven system and doing thorough research can point you in the right direction.
STEP 1: Evaluate Yourself Before Searching for A Franchise
Before you start researching franchises, consider the most vital element in your decision-making process – YOU.
Experience as a business owner certainly helps, but it’s your unique combination of specialized skills and comfort with taking on financial risks that will help determine what franchise opportunity best fits your needs.
- Skills & Interests: What do you like doing? List your strengths based on your prior business experience.
- Management Style: Are you an owner/operator style manager, or an manager/led style manager? Understanding your management style is critical at this stage.
- Financial Capacity: How much money can you afford to invest? Consider your total investment dollars available, and how many dollars you need to make per month to support your lifestyle.
- Logistics: Where would you like to be working and are you willing to move to another area of the country for the right franchise location?
STEP 2: Conduct Thorough Franchise Research
It is also important to remain as open-minded as possible when looking for a business opportunity. Many new franchisees make the mistake of locking into one concept – like donuts or gyms – only to find they lack the financial capacity or that the market is already saturated.
This includes both using franchise broker services and conducting your own research online.
With thousands of franchise brand options available, the best strategy is to look at the track record of various companies. A strong brand is a powerful asset that can attract customers much more easily than a startup.
STEP 3: Contact Franchisors and Request Concept Details
Once you have a list of promising franchise opportunities, reach out. You’ll likely speak with a development representative who will gauge if you are a good fit for their franchise system.
Key questions to keep in mind:
- Do they produce quality, updated marketing materials?
- Does the franchisor provide clear answers regarding ongoing support?
- How does the franchisor's support structure look?
Fact: Strong training and ongoing support can lead to a 20% higher success rate for new franchise owners.
STEP 4: Read the Franchisor's Franchise Disclosure Document (FDD)
Reading the franchise disclosure document is a crucial step in your due diligence. This document is required by law and contains the “DNA” of the franchise business.
What to Look for in the FDD:
- Financial Performance Representations: Find the profit potential under Item #19.
- Costs: This includes the initial franchise fees (which can range from ten thousand dollars to several hundred thousand) and royalty payments.
- Training: The FDD provides an overview of both the initial and ongoing training that will be provided to the franchisee. Training is particularly important for inexperienced business owners.
- Background: Check for a high litigation history or bankruptcy, which is a major red flag. Also, see if the company is backed by a private equity firm, as this can affect the long run strategy of the brand.
- Territorial Rights: Is the territory exclusive? Are you protected from having another franchisee within your territory?
STEP 5: Speak With Current and Former Franchisees
This is an extremely important step; make phone calls to fellow franchisees (both current and past). Fellow franchisees are the best resource on how they operate on a day-to-day basis.
Call recent franchisees and ask them about their profit margins, and do the franchisors really live up to what they promise? Ask current franchisees about their experiences with the daily operation of running a business within the system.
This will provide you with a true representation as to whether or not other franchises in that particular system have been able to succeed.
STEP 6: Narrow Down Your Choices
Compare your choices. There are many ways to do this. A good way is to make a list of the top 3-5 companies and then create a side-by-side comparison.
Evaluate the market and location:
- Foot Traffic: If you are looking into purchasing a restaurant or retail franchise, foot traffic is a very important factor.
- Target Market: Is the target demographic of the local area similar to the demographics of the franchise?
- Competition: How much competition will there be in the area? Many successful franchises find an area where they can capitalize on high demand and low competition.
- Future Growth: Are there any future development plans by the city that may affect your business location?
Before the final choice, attend a discovery day. This on-site meeting with the franchisor allows you to meet the team and potentially get hands-on experience.
STEP 7: Make Your Final Decision and Invest!
The last step is signing the franchise agreement. There will be an element of fear as well as excitement with the decision. Most likely, you were required to invest a substantial amount of money into the franchise, and many franchisors will charge a percentage of your gross sales in royalty fees until you reach your profit margin.
If you’ve done your due diligence, reviewed the financial performance representations, and talked to other franchisees, you should feel confident.
Congratulations: you are ready to begin your path toward achieving success as a franchise owner.
FAQs
The first step is a self-evaluation of your special skills, financial capacity, and risk tolerance. You need to know if you want to be involved in daily operations or hire a manager.
Self-evaluation will help prevent the purchase of a franchise that does not meet your current way of living. Many franchises will have requirements that include weekend hours of operation; may not support your overall family needs.
Be willing to consider many things and don’t focus on what you enjoy doing. Consider using franchise broker services, researching the background of the franchisor, and comparing the total cost of investing in the franchise with the possible earnings from owning that particular franchise opportunity.
You want transparency. When a franchisor does not provide you with access to the Franchise Disclosure Document or will not allow you to speak with new franchisees who have purchased franchises within the last year or so, this is a red flag.
Compare at least 3 franchise opportunities side-by-side: location, target market, and how much support they will continue to offer.
Final Thoughts: Your Path to Franchise Ownership
Navigating the complex industry of franchising can feel like a full-time job before you even open your doors. However, by following these seven steps, you move beyond the initial search and start to decide with clarity.
Whether it’s your goal to continue running your business for years to come or whether you ultimately hope to sell your existing location, your commitment to a time-tested process will set you apart from other potential competitors.
Leave nothing to chance! These 7 steps will give you a good starting point. But don’t think for one second that the over 20,000 available franchise opportunities won’t make this experience seem as though you’re trying to find a needle in a stack of needles.
Talk to FranchiseCoach Adam Goldman to cut through the noise and find the right franchise. Get expert guidance to move forward with confidence.
