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 is 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. It’s unfortunate, but true, the majority of franchise buyers do not put enough effort into their homework before purchasing. In fact, most do not understand what they should be examining or how to analyze the information available. The reason is simple. They have no experience and rely too heavily on blue sky and dreams. All too often, franchise buyers are swept away by salesmanship and that is not homework or due diligence. It’s dream fulfillment.
Where to begin
All franchisors are required to provide a ‘franchise disclosure documents’ (FDD) to prospective buyers. Within that document is an enormous amount of information about the franchise. You’ll find management background and experience, cost of buying the franchise, costs associated with royalties, advertising fees, existing locations (both open and closed), and much more. But just because there is a great deal of information, that doesn’t mean it’s easily understood and it doesn’t mean that it’s contains everything a buyer needs to make an informed decision.
It’s the buyer’s responsibility to read, understand and ask questions about those documents and in order to do so, it’s imperative to retain adequate counsel. Disclosure documents and franchise agreements are tricky at best. One must be able to dig deeply into the materials. It’s not just about what’s in 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
The disclosure document will contain an Item 19 as part of the package. In terms of income or moneymaking potential, all franchise disclosure documents contain an ‘Item 19’ where claims of financial performance can be found. But again, this is tricky because most will not tell you how much franchisees earn, instead it will provide statistics on how to start studying the subject more closely. And, don’t be surprised to find no information within this section. The section is not required to have any comments whatsoever. It can be left blank. What does that tell you?
Nurture relationships with existing franchisees and eventually they will help you gain insight as to the franchise performance and how the numbers work. And heed this word of caution. If you choose to investigate through existing franchisees, go beyond the names of owners provided by your salesman. Of course they’re going to send you to successful units. Visit as many units as you can manage.
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. Once again, there are no guarantees in franchising, but there ways to increase the buyer’s odds of success. s