What Every Franchise Buyer Wants To Know – And Should
To wonder if a person can make money with a franchise is the age old dilemma facing every potential franchisee. And well it should. Unfortunately, and as you most likely know, there’s not a one-size-fits-all answer and there never will be. Within a given franchise system, the data can and will vary from location to location. And, just in case you are brand new to franchising know this. No franchisor is going to predict your future, not only because it’s foolish, it’s illegal.
First, the FTC (Federal Trade Commission) regulates the nature of franchise disclosure and prohibits franchisors from discussing “financial performance” unless such claims are supported by very specific language in the franchisor’s disclosure documents (FDD – Franchise Disclosure Document). For a number of reasons perhaps 50% of all franchise companies publish data on financial performance. One of those reasons is that many franchisees don’t succeed. (Indeed, franchise failure, while rarely, if ever mentioned by industry supported groups, is quite high.) And the problem with so many FPR’s is they don’t offer enough salient information to perform quality investigation.
How Much Money Are Franchisees Making?
Truthful answers to that question are not easily obtainable. Investigation beyond the FPR’s, if available, is tough and requires interviews with existing franchisees. Unless a buyer has an established relationship with a current franchisee, answers are hard to come by. And if one does not have such a relationship, then building one and gaining the franchisee’s confidence is generally going to take some doing. In years past, franchisors rewarded successful franchisees for shilling for or endorsing the brand, and that is most likely practiced routinely now. Of course, for a buyer, rave reviews from highly successful operators are not what should be sought out. To really determine if one can make money with a franchise a cross section of performance is needed. But again, confidential information is not easily gained.
Gathering Franchise Financial Information
Franchise opportunity sellers, whether it’s the franchisor or their representatives (brokers) will, at best, be able to provide an FPR (financial performance representation). And, as mentioned above, FPR information is usually only a starting point, if that. For example, instead of stating that 20% of units ‘X’ years old had gross sales of ‘Y’, you might be told that the average cost of goods sold is ‘Z’. That might be part of a business plan, but not adequate for buying purposes. And by the way, as a giant note of caution, if a franchisor cannot even offer an FPR or offers one of little to no value, then move on.
Can You Make Money With A Franchise? Here’s The Only Way To Know (Maybe).
- Find the type of business you want. This means a segment of franchising such as food, personal services, etc. The Focus Program For Emerging Entrepreneurs is a system for making decisions about self-employment.
- After studying franchises specific to that field, visit with franchisors. Do you like them as people?
- Choose the handful of concepts that appeal to you personally and professionally.
- Learn franchise due diligence. Listening to franchise sellers will always be blue sky and happiness. Franchise due diligence is key and it requires hard work to dig in. Put sales hype behind you and study facts.
- Take the time to visit with multiple franchisees. Gain their confidence and carefully ask, in generalities, about their experience and results. If you’re fortunate enough to gain a friendship, specifics will be forthcoming.
- Don’t rush the process. If pressured by a broker or franchisor, walk away.
- Too many buyers make a purchase based on a romance with a franchise or its sellers. While ‘liking’ an opportunity and its management is mandatory, financial due diligence has to be factual.
- The Bibby Group offers quality franchise due diligence services, but a buyer with a keen eye, a stubborn nose for facts and the patience to find them will do far better than most. Of course, no one can predict success or forecast if you can make money with a franchise, but due diligence will always put the odds in your favor.