How To Choose A Franchise Moneymaker
First, unless you purchase a franchise business that is already operating, you cannot be sure it’s a moneymaker. Even if a franchise brand is historically profitable, it’s not a guarantee that the next unit will follow suit. This is where franchise due diligence becomes such an important part of research and selection. The vast majority of franchise buyers never put enough effort into their homework. Why? Because they don’t understand what to examine or how. Why would they if they don’t know how?
Where To Begin
Franchisors are required to provide a ‘franchise disclosure document’ (FDD) to prospective buyers. Included are such items as management’s background and experience, cost of buying the franchise, costs associated with royalties, advertising fees, locations, and much more. But just because there’s a great deal of information, it doesn’t mean it’s easily understood and it doesn’t mean that it contains everything required to make an informed decision.
Disclosure documents and franchise agreements are tricky at best. One must be able to dig deeply into the materials. To determine if a franchise is, or can be, a moneymaker, one must understand what’s in between the lines, and also what is ‘not’ being said. Experience and research are the keys.
The ‘Money’ Section: Item 19 – But Don’t Let It Fool You
While disclosure documents have an Item 19 dealing with financial performance, there’s no requirement to include such information. In other words, it can be left blank. Big help, right? In addition, often times the information included is entirely worthless when trying to put a business plan together. Inexperienced buyers are at a tremendous disadvantage trying to gather facts.
Nurture relationships with existing franchisees and eventually, if so inclined, can help you gain insight as to performance. Heed this word of caution. If you choose to investigate through existing franchisees, go beyond the names of owners provided by a salesman. Of course they’re going to send you to successful units.
Note: ‘Free Franchise Consulting’ indicates a franchise broker, not a consultant. These folks make introductions to franchises pay them a commission. Know the difference between a franchise consultant and broker.
Get Expert Help
Again, and above all, do your own homework and get help with those things you don’t understand. The Focus Program for Emerging Entrepreneurs provides an outstanding module on franchising and due diligence. But at the end of day, if you’re serious about making a purchase, get expert help when Buying a Franchise. Obviously there are no guarantees in franchising, but there ways to increase the odds of success.