There are thousands of franchise opportunities for entrepreneurs seeking a proven brand concept. The top franchise industry is fast-food with McDonalds leading the pack. But there are other hot brands out there based on need and niche markets.
According to Washington, DC-based International Franchise Association, an industry trade association, roughly 825,000 franchise businesses across 300 different business categories provide nearly 18 million jobs and generate over $2.1 trillion to the economy.
Purchasing a franchise, whether it be an existing one or a new development,Â can be a major investment on the part of the potential entrepreneur.
“As with any investment, one wants to make sure that they are gathering as much information as possible to position themselves for success,” says Kevin Hicks, a Partner with Blackman and Associates, a franchise consulting firm with offices in New York and Atlanta. Blackman & Associates identifies viable and lucrative franchise opportunities for both startups and existing businesses.
Hicks, who has also been a multiple unit owner of several food franchise concepts, offers five keys to consider when evaluating a franchise purchase, regardless of what brand.
1.Â Return On Investment. Conduct research intoÂ what grossÂ revenues and profitÂ marginsÂ are forÂ your desired franchise business. You can get this information one of three ways. One way, all franchise companies are requiredÂ by the Federal Trade Commission to provide a disclosure document called the Franchise Disclosure Document (FDD). The FDD is a valuable tool when examining a franchise. I recommend that all potential franchisees review itÂ and engage an attorney to do soÂ with them as well.Â ItÂ is full ofÂ allÂ kinds of information about costs, expenses, brand leadership, products offered,Â and servicesÂ provided by the franchise company. It also can also provide earnings information in Item 19 in the FDD.
Contrary to popular belief, all franchise companies can provide earnings claims, but most do not. There areÂ well known brands that areÂ showing leadership byÂ havingÂ FDD’sÂ that doÂ provide earnings and profitability for their franchise.Â Meinke Car Care, Firehouse Subs, Fastsigns, Anytime Fitness, Dunkin Donuts, Popeye’s Chicken and Biscuits, 7-Eleven, and GNC all provide earnings claimÂ statements.
A second way to get this information is get theÂ contact information of current owners from the FDDÂ and find out what the earnings are on average.
A third wayÂ to get earnings information is throughÂ identifying annual lists from industry research firms, like Technomic.
2.Â Support Services and Training. There are two primaryÂ benefits of buying a franchise.Â One benefitÂ is it isÂ a proven system for doing business, with training inÂ business accounting systems, managementÂ strategies, how to utilize local and national marketing programs, group purchasing power, teaching hiring practices,Â and how to maintain inventory control.
TheÂ second benefitÂ of franchisingÂ are the support services offered by the brand to increase your chance for success.Â When you have a franchise you are in business for yourself, but not by yourself. TheÂ franchisor only makes money if you make money. As such they have a vested interest in your success. To that end, the best franchisors provideÂ support to their franchisees in a variety of ways, such as sending out company consultants to assist with ideas of how to fine tune operations, recommend localÂ marketing strategies, and other suggestions on how to increase profitability.
3. Marketplace Presence. The factors that make up market presence are a) number of closings, b) lawsuits against the franchisor, market saturation of stores, and c)Â planned future development. Lawsuits against the franchisor are required to be listed in the FDD. You should review them, as this will tell you the problems that mayÂ exist with the franchisor and its franchisees. Market saturation limits the potential sales of your business because of the presence of too many stores in a particular area with the same brand. Too many closings may mean that the brand is not highly desirable or viable in your market, or maybe even nationally. Inquiring about future development will share with you the opportunities for futureÂ growthÂ and expansion. It will also tell youÂ the demand for the brand in the marketplace.
4.Â Â Number of Corporate Owned Stores. This information tellsÂ one where the focus of theÂ franchisor is with their business. If a brand has more than 15% of its units owned by the company, is that franchisor focused on assisting franchisees with increasing theirÂ sales and profitability or on operating their corporate units? The percentage of corporate stores speaks to the brands concentration on effort. The primary purpose for company owned stores should be toÂ setÂ operating standards,Â and to maintain control of product or serviceÂ offerings.Â Franchise segmentÂ leaders such asÂ Anytime Fitness, DunkinÂ Donuts, and Liberty Tax Service, have less than 5% corporate owned units.
5.Â Reputation in Lending Community.Â Access to capital is a key component in the success of any business. Franchising is no different. Whether it be start-up, expansion or working capital,Â how a brand is perceived in the lending community is extremely important as it relates to your ability to secure financing for your franchise. The number of loan defaults of a franchise concept will frameÂ how receptive the lending community is towards financingÂ a particular brand. Question several lenders about a possible loanÂ to your prospective franchise business to get a feel for its marketplace desirability.
Also, check the federal government’s annual Small Business Administration (SBA)Â franchise loan default list.Â This list shows the percentage of franchise loan failures from the lowest rates to the highest. Brands such as Anytime Fitness, Comfort Suites Hotels, and Massage Envy all have less thanÂ five percentÂ SBA default rates.
“Much like franchising, following these fiveÂ key considerations won’t guarantee success, but doing so will greatly minimizeÂ the risk of your investment,” adds Hicks.