Making the decision to buy a franchise is a massive business and life choice. The decision you make will determine the time, investment capital, and risks required for the next decade of your life due to the standard length of most franchise contracts. No pressure or anything!
And if you think franchising is always a sure thing, think again. You don’t need to look far to find failed franchisees that lost millions pursuing their dreams. For example Meridian Restaurants Unlimited who owned 115 Burger King locations filed for Chapter 11 bankruptcy in 2023. Even if you buy into a nationally recognized franchise, it is no guarantee of success.
So what are the things you should research and understand before buying a franchise? This guide is all about helping you identify what to research before signing that franchise agreement so you’ll have no regrets or surprises if you decide to move forward.
Review the FDD
A Franchise Disclosure Document, also known as FDD, is a document that provides all the necessary information a potential franchisee needs to know about the franchise. It includes the business’s initial fees, investment details, restrictions, litigation history, financing, trademarks, and many more. The FDD is a legal document and franchisors are required to show this to franchisees who are in the process of signing up for a franchise with them.
So keep in mind to always ask to see the FDD before you sign any agreement that will bind you to the franchise or before you start paying for anything. This document gives you the financial performance and typical performance of current franchisees.
Read Reviews of the Company
The internet is a very handy tool when you want to know whether a franchise is good one or not. It’ll also give you information if it’s a scam or not. You can just simply type in the name of the company you wish to franchise and add the keywords “franchise reviews” to a search engine and read the results provided. More often than not, you’ll find that a lot of franchisees have posted reviews of the companies they’ve worked for or there are other articles written that include a detailed account of what to expect when you get into this certain franchise. This can also give you an idea whether the franchisor is the real deal or not.
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Most franchises also have accounts on social media. You can check the comments and see if there are any engagements such as customers commenting or leaving reviews about them. One helpful tip to know whether a social media account is legit is to spot a check mark beside their name (applicable for Facebook and Instagram). You can also check out any employee reviews on Glassdoor or Indeed to get an understanding how employees of the company perceive working at the brand.
Check the Status of the Franchise Locations
Visit a franchise location near you.
Another way to check out if a franchise is performing well is to check their locations. Some franchisors might claim they have several locations but you find out later that they’re all closing down due to bankruptcy or some other issue. It would be best if a franchise has several operating locations so you can visit them and see for yourself what it’s like during its operating hours. This isn’t a perfect process, but it gives you grounds level knowledge about how a location is doing.
Reach Out to Current Franchise Owners
A great way to learn about a franchise is to talk to fellow franchisees. They’ll be able to tell you the lowdown in working for the company such as how the business is run, the perks they enjoy, and the challenges you can expect along the way.
Some franchisors even include talking to their franchisees as part of the steps before franchising with them. A franchise owner’s outlook in running the business will help you understand more about the franchise and whether or not it’s the right one for you before you make things official.
Keep in mind that not every franchisee is going to want to talk to you. After all, they’ve got a business of their own to run. Keep reaching out to different franchise operators until someone agrees to meet with you in person or over the phone.
Read Franchise Breakdowns and Reviews
Franchise breakdowns and reviews will give you a clear picture of the business before you decide in franchising. Expenses and financial requirements are discussed as well as the franchise’s revenue and profit.
These breakdowns also include the advantages and challenges of franchising a certain business so you can weigh your options and can help you come to a decision. You can check out some of our franchise breakdowns and reviews such as the one we did for Shaq’s Big Chicken and the MrBeast Burger.
Meet with a Franchise Consultant
A franchise consultant is one who helps interested entrepreneurs in understanding the ways to franchising. Do note that they are not salespeople in which they don’t try to sell you a franchise. Rather, they act more like coaches so that they can assist you in whether or not a franchise is worth investing.
McDonald’s is the most globally recognized franchise.
So if you’re aspiring to own a franchise and would like to know more about it, meet with a franchise consultant so you can better understand the necessary details, the process, and the potential outcome in owning one. You can also complete this quiz to get connected with an experience franchise broker who will help you you through the evaluation and purchase of a franchise.
Visit a Franchise Location
As mentioned above, checking the status of a franchise’s locations is a way to make sure that business is doing well. You may also want to step it up a notch by actually visiting these locations just to see for yourself how it’s running during the day.
If it’s a restaurant franchise you’re eyeing, you may want to sit and dine just to observe. If it’s a service kind of franchise such as a gym or a laundry service, you can also place an order and observe in the parking if they have a lot of customers. Visiting a franchise location will help you understand more about the business and how they function day-to-day.
Check for Legal Disputes
Before purchasing a franchise, it is important that you check the company’s litigation. This is usually listed as Item number 3 in the Franchise Disclosure Document.
The litigation section of the document will show if a company has undergone lawsuits and what actions were done. You can also do a quick search online if the company has been sued before and if they were on the news. Researching the company’s litigation can help you check what issues they’ve dealt with in the past and how they were settled.
Responsibilities of the Franchisor and Franchisee
There are certain expectations that both the franchisor and franchisee expect in each other once that franchise agreement is signed and it’s good to know beforehand what these are. This sets a clear boundary in which both parties are well aware what they need to do since a business relationship grows better if both work hand in hand. These responsibilities can be discussed upon your initial meeting with the franchisor and they’re also stated in the FDD.
Evaluate Marketing Campaigns
As a franchisee, you need not worry about thinking how to market your franchise since all the marketing materials are provided for. But it would help to assure you if you knew just what kind of marketing ads your franchisor planned because not every community will respond to the same advertising.
For instance, does your community rely heavily on radio or TV ads? Does the franchise post ads on social media? Would giving away coupons or have social media influencers come be more effective in getting your name out there? If the franchise is actively marketing the product or service across a broad range of marketing channels its more likely customers will be reaching out to you directly in the future.
Questions to Ask Before Signing a Franchise Agreement
Now that you know the tips on what to research before buying a franchise, you also need to know what questions to ask before you finally get to sign that franchise agreement that makes things official.
Will I be able to have territory rights?
Protected territory rights is an area that is granted to the franchisee alone. This means that other franchisees and even the franchisor (depending on the contract) won’t be able to put up a franchise in that area. This can be advantageous for you since it minimizes competition within the same franchise. Be sure to ask if your franchise covers territory rights or you can check the FDD if it’s stated there.
How long does it take to build out and reach grand opening?
One good question to ask the franchise development team of the company you are eyeing is the duration of the build out of your store and when is it expected to open to the public. This question can help you plot out the work timeline of your franchise. Make sure the duration is also stated in the franchise agreement before you sign it.
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What are the financial requirements and expenses?
It is always recommended that you should ask about the financial requirements first before you agree to buy a franchise. These requirements are the minimum liquid capital and net worth the franchisor is expecting you to have. You should also ask what the initial investment is as well as the franchise fee. There are also several ongoing fees that you should take note of. All of the expenses and breakdown of investment can be found on the FDD but you should go over them once more with the franchisor.
Is the company financially strong?
You want to purchase a franchise that has a strong financial standing. This means going over their financial statements. You can also have this checked with a financial advisor A franchise that has a strong and improving financial report means that they’re doing well and that they’re worth investing not just now but as time passes as well.
What franchises does Shaq own?
How much money can I make?
It’s only natural to ask the franchisor how much money would you be able to make if you franchise with them. Although they will not be able to give you an exact number, they’ll most likely give you an estimate along with the factors that affect such data. But this is considered helpful so you can get an idea as to how much your revenue would be.
What is the training like?
Franchisors hold training for incoming franchisees so they know how to run the business. It’s best to ask what kind of training you will get. Is it all online? Will you be visiting the headquarters? Will you get to train at another location prior to opening? Will there be an annual training program as a refresher? These things are important to ask before you purchase a franchise.
Why should I franchise with you?
Franchisors are also salespeople. They’ll need to deliver a good presentation to get you to purchase a unit with them. They have to be convincing along with their words backed by facts. They should be able to give you a few convincing points. Listen to their pitch before you finally seal the deal.
What is the initial investment required? What are the ongoing fees and royalties?
These should both be disclosed in the FDD documents. All of our franchise reviews like this one for McDonald’s includes the initial investment and fees associated with the opportunity.
How much time should you spend researching a franchise opportunity?
You’re probably wondering if there’s a significant amount of time you should spend researching buying a franchise. There is no right or wrong amount of time but it would be best if you could take a few weeks to minimum to digest the information. Similar to buying a house, you never want to make a fast decision on such an important financial and life decision.
There are some franchises that provide promos for those who wish to purchase a franchise with them. For example, they might offer a discount on a second unit but the promo runs until the next month only. If you’re eyeing this franchise then you might want to research quickly so you can avail of the promotional opportunity. If you can get your financial advisors to take a look at the FDD with you while you’re also talking to other franchisees for their input, you might be able to finish your research in a short time.
There are some franchises that only operate on certain months or franchises that have peak seasons. For instance, Pelican SnoBalls is a franchise with over 500 units. They’re not open all year round and they close four months each year. If you were to franchise with them, you’d have to decide accordingly so you can coordinate a build-out schedule with them that won’t affect your opening months.
Do remember that the duration in researching if a business is worth the investment varies from franchise to franchise.
What makes a good franchise opportunity?
So you’ve done your research. But how do you know if a franchise is a good opportunity or not? Here are a few signs you’re on the right track.
Growth in the Industry
If the services or items that the franchise is selling has an expected growth, there’s a likely chance it’ll do well. You can find out more about this if you check the statistics online. For example, the take out fried chicken market is expected to reach $9.85 billion in 2023. With that said, you might want to look into fried chicken franchises.
Have you completed your due diligence with franchise research?
Improving Financial Statements
You can ask for a copy of the company’s financial statements upon your meetings with them. If you find that their revenue and profit has had a steady rise through the years, then this is a sign of a good franchise opportunity.
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Growing Number of Units
A franchise that’s growing in number is a sign that they’re doing really well and that they’re worth checking out. It also means they might have some pretty good deals and reasonable financial requirements if there are lots of units being developed. On the flip side, if you see the number of units declining each quarter it’s a flashing red warning.
How do you identify franchising opportunities?
Think you spotted a franchising opportunity that you’re interested in? Here are a few things to consider.
Contracts and agreements can give one a headache because they’re difficult to understand. So if you spot a franchise that makes you feel like it’s simple and easy enough to comprehend, they’re worth checking out.
Having a good location is one of the factors that contribute to a franchise’s success. The right location is one of the most powerful marketing strategies especially if you’re in a food or retail franchise. For example, McDonald’s has mastered the art of buying up real estate right off the interstate or freeway for this exact reason.
Find a franchise with less competition. There are a few key advantages.
Less competition means more customers for you. When there are fewer businesses in your market, there are more potential customers for you to serve. This can lead to increased sales and profits.
Less competition means less marketing expense. When there are fewer businesses in your market, you will need to spend less money on marketing to reach potential customers. This can save you a significant amount of money on marketing in television, online, or direct mail.
Less competition means less stress. When there are fewer businesses in your market, you will have less competition to worry about. This can lead to less stress and more time to focus on running the business.
What criteria should you use when evaluating a franchise opportunity?
The following guide below should help you check whether or not a franchise opportunity is worth a try.
We mentioned all about the franchisor’s growth above. In line with this, you can check if the industry you’re about to franchise has pretty good statistics. If all data seems to be on the rise, then it’s safe to say that the franchise you chose is a good investment.
Franchising can be expensive so before you sign any agreement, you should check whether you have the financial capability to afford such a franchise. If the investment range is within your means, then go for it!
As mentioned above, having the right location for your franchise is very important. This can greatly affect your operations and revenue. When you pitch your interest to franchise, you give the franchisor an idea where you wish to put up your location. Be sure that you have done your research on this so that there are no regrets when the time comes to put up your franchised unit.
Do a little research on the franchisor and their team behind the business. Check out their work experience and how long they’ve been running the franchise. People who are qualified to run a business will know how to keep things moving forward and how the company can grow everyday. You’ll want to be backed by a team who knows what they’re doing now and in the future.
Ongoing fees such as royalty and ad fees can become very expensive so it’s best to check the FDD prior to signing an agreement if the fees are within reasonable means. You don’t want to be swamped with such expensive payments in the long run.
Rick Ross invests in franchises.
The reality in franchising a business is that the more popular the brand name is, the more your business will garner customers. So when you’re in the process of choosing a franchise to run, choose one that’s well-known. Popular franchises can also mean that they’re credible businesses.
Franchisee Satisfaction Survey Data: This data can be found on the franchisor’s website or by contacting the International Franchise Association (IFA). This organization includes information about and data about franchisee satisfaction.
By taking your time and using the research process outlined above, you’ll be ready to sign (or pass) on that franchise agreement with more confidence.