You’ve decided to branch out and start a franchise business, but may be weighing your options between a couple intriguing options. Pros and cons exist with every business opportunity, and it’s important to weight those options critically. Like most soon-to-be franchise owners, you are probably looking for the “perfect” franchise.
The problem is, the “perfect” franchise doesn’t exist. What you really need to be looking for is the perfect fit for you, taking into account your capital investment, time required, passion for the business and your long-term goals.
Before you commit to buying any franchise, follow this checklist to make sure you’re 100% ready to sign the papers and start your new business.
1. Decide on your area of focus
This is the single most important part of the process. Do you want to be a “worker” or a manager? Are you interested in servicing consumer customers or businesses? Are you looking for absentee, semi-absentee or hands-on management? Are there industries that you are passionate about? Perhaps you want to help small businesses succeed, or maybe you want to educate children, or you may have a desire to help developmentally challenged individuals. No matter where your passions and interests lie, there are franchise models in those spaces.
2. Research your market territory
Once you have a general idea of the industry you are interested in, determine if competitors are already in the market. If so, how many competitors exist and where are they located? Competitors aren’t a bad thing—in fact, a complete lack of competition is a red flag!
By learning more about your market, you’ll have an idea of the long-term potential growth for your business. Start building a rough framework for a marketing plan, which will help assess the true marketing potential. If you do venture forward with that business franchise you’ll have a head start on your marketing plan.
3. Determine barriers to entry
Once you have landed on a basic industry, determine if there are significant barriers to enter that industry, such as knowledge, licensing requirements, product availability, etc. If there are not, you may actually determine you are better off going it alone than franchising. If there are, you now have a measuring stick to determine if the franchisors that you are considering can truly help you get over those barriers.
4. Conduct your own primary research
This is similar to #2, but using your own sphere of influence. Ask people in your potential market if they’re interested in the services the franchise will offer. This could be an informal survey online, through social media tools or forums like Reddit and industry-related websites.
If you’re bold (and a franchise owner should be bold), you can even stand on a sidewalk in your franchise territory, armed with a clipboard and questions related to the business. Ask your potential customers questions and get their honest reactions. For example, if you’re interested in opening a restaurant franchise, ask people if they like that particular food. See what the response is from complete strangers who have no concern about hurting your feelings or not supporting you. Those will be your customers, so make sure the demand actually exists.
5. Do a SWOT analysis of each potential franchise
This is like the ultimate marketing pros and cons list. A SWOT analysis factors in the strengths and weaknesses of the business combined with potential opportunities and existing or future threats. Be honest when creating this list, and don’t make strengths or opportunities that don’t truly exist. If there are any red flags in the analysis of weaknesses and threats, you’ll have a better idea of the risks and challenges ahead if you choose that business.
6. Determine what makes the franchise unique
You’re going to face competition, and the best way to combat competing business is by differentiating your product or service. If this differentiation is already built-in to your business, you’re a step ahead of the game. Find out what will attract customers to you instead of them choosing to do business with other companies. If you see a differentiation in the product or service, and you’re excited by this potential, then you’re on to something.
7. Talk to other Principals
This step is often limited to serious candidates that have reached certain milestones, but nothing beats having a real conversation with people already running a similar business. They’ve been through the start-up challenges, and they’ve faced obstacles that you’re about to encounter. After meeting or discussing the franchise opportunities with the franchisor, ask them for the contact info for Principals so that they can validate the information that you’ve received.
Learn from the existing business owners and soak up everything they say. If the franchise is everything it’s cracked up to be, you’ll get a read on that directly from the source. This is also a great opportunity to see what kind of Principal network and support system is baked into the franchise. You don’t want to buy into a company and then be left to fend for yourself forever.
8. Assess the true start-up funds needed
What cash flow will you require in the first one to three years of business for this franchise opportunity? If you have that equity at your disposal, you’ll be in great shape no matter what comes up as you get your business started. If you don’t have that accessible, find out if the franchise will support you and match funds for start-up and growth. As you make this analysis, keep in mind the costs to keep the lights on at home, too, if you are going full time into the business!
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9. Understand the history of the franchise
You’ll learn about a company’s values and mission when you understand how it came to be. Ask questions about the early years of the company and how it evolved to what it is today. Do its core values align with yours? What does the history of the brand tell you about the future? What about the history of the industry?
10. Learn about the tools and resources provided for support
Will the corporate office provide each franchise with training, marketing and sales support? Are there online resources at hand, in person training sessions and ongoing webinars to keep you professionally educated? Some franchises offer fantastic support in this regard, and others may fall terribly short. Since you’ll be running your own business, you should factor in all the support you can get.
11. Determine your potential ROI and how long it will take to make a profit
You shouldn’t be playing the role of a starving artist for too long. After all, you escaped the rat race and are in business to make money and have financial freedom. Map out your return on investment to get a break-even point. Is that date within the first year or two, or is it well into the future? If it’s too far off, then you’ll be cash strapped and probably won’t have much fun in business. Make sure your franchise will be profitable within a comfortable time frame. Your stress levels will thank you for that extra due diligence.
Important: When you are talking to professionals about ROI, understand what measures they are using for their calculations. There are different means of measuring ROI, such as total investment vs. cash-on-cash. Make sure you are comparing apples to apples.
12 . Look for a positive long-term outlook for the franchisor
No one has a crystal ball, and you can’t know the future. However, you need to do your best to understand the future of the franchisor. Make sure they’re on solid ground—financially, culturally, and for the industry in general. When you buy into a franchise, you are buying into that corporate culture, and can build upon what already exists. Make sure you’re building on ground that you personally believe in from the start. And it’s always a positive when the company you’re connected to is financially stable with plenty of opportunity for future growth.
Ticking off this checklist will better prepare you to take the leap into franchise success. You’ll know you’ve done your due diligence to learn about the company and what will lie ahead if this opportunity is your right fit.
If you’re ready to learn more about buying your own franchise, talk to our experts today.
Originally published April 27, 2016, and updated in June 2017.