Finding the right franchise is the critical first step to franchise success. But wading through information, spin and financial documents to find a healthy one is key.
To help, here are 10 signs to look for in a franchisor. Much of the information will be found in the franchise disclosure document (FDD) and during visits on Discovery Day. Potential franchisees should be on the look out for:
- Happy franchisees: If the franchisees in a system are content with the franchisor, this speaks volumes about the potential health of the franchise system. Franchisors will recommend franchisees to speak with, but don't just settle for those hand-selected. Contact others as well and track down former franchisees. Ask why they left and judge what those reasons say about the franchise. Personal reasons, or a family crisis are one thing. But if they felt unsupported or frustrated by the franchisor, probe deeper.
- Litigation history: Franchisees and franchisors can take each other to court over any number of issues. What's the case history, and who started the disputes with the chosen franchisor? If there are few disputes between franchisee and franchisor, this is obviously a good thing. But long-ago lawsuits also can be explained if there have been significant changes in the years since. Red flags if the suits are new or pending, yellow caution flag if they're outdated and a firm green if there are few or none.
- Earning claims: Franchisors must be confident of the success of its franchisees if they list a claim in the FDD. But if there is no earnings claim, it doesn't necessarily signal bad news. Remember that the documents related to the franchise industry changed significantly in 2008, so some companies haven't caught up.
- Protected territories: Different franchisors have different notions of protected territories and any sort of documents should be clear. The protected territories may be based on Zip codes, a metropolitan area or none at all. Sometimes, no protected territory makes sense, when a franchisee might need to develop a client base that isn't limited by area. But if it's a retail outlet, obviously, a franchisee will want to ensure there are some protections there.
- Evaluation of the prospective franchisees: Top franchises won’t sell its franchise business to just anyone; it will evaluate the applicants the same way the applicants evalute it. This can help prevent franchises from failing due to poor management. If the franchisor doesn't seek much information about the prospective franchisees, it may be more interested in selling franchises than in the long-term health of the business.
- Multi-unit franchisees: When newly opened units are owned by exisitng franchisees, take it as a healthy sign. That means that the franchisees have had some level of success with one location and are ready to take on more.
- Extensive training: The training is the most important part of starting a franchise. It teaches the business model of the franchisor and franchisees learn to run the franchise business on a day-to-day basis. So, if the franchisor has an extensive training program, which includes both technical and operational classes, then it’s a franchise concept worth investing.
- Financial support: Many exisitng franchisors have relationships with financial institutions and can offer assistance with paperwork for potential franchisees seeking finance. Also, look for franchisors that are approved by the Small Business Administration -- it can make securing a loan much easier.
- Solid financial strength of the company: A franchisor can support its franchisees best when its not struggling to keep its doors open. Heed the financial statements of the franchisor and perhaps consider using an accountant to help decipher the documents.
- Allows franchisee association: There are many franchisee associations, which protect the interest of the franchisees. So, if a franchisor allows its franchisees to join such a group, it signals that it wants healthy relationships within the system.
This is just the beginning, of course, but finding the right franchise requires a lot of homework. But consider that it's likely one of the largest investments a franchisee will ever make. Paying attention to the health of the franchise is a critical component of success.
The copyright of the article Finding Healthy Franchisors in Small/Home Business is owned by Sandy Smith. Permission to republish Finding Healthy Franchisors in print or online must be granted by the author in writing.
