Millions of Americans have chosen to invest in their own business, many of them, via a franchise. While certainly a little bias, I’m certain these are the smart ones! According to many business sources, franchising growth rates far outpace non-franchise growth rates. The brand, marketing, systems, operational procedures, technology and support make franchising a wise choice for business ownership.
There is much to consider when researching the “right” franchise to invest in: cost of entry, product or service, territory, management team, franchise disclosure document, competition, governmental factors, etc.
Once all of those are considered, then the fun part starts; speaking to the franchise owners. This is where the rubber meets the road as they say…or not! The franchisor can have the best website, marketing materials, due diligence process, etc. But if the franchise owners are not happy and willing to share with you why they choose the franchise, to me, that is a big red-flag.
So how does one approach gathering data and deciphering information from actual franchisees? Pretty simple, right? Craft up a list of questions like; “Are you happy?” “When did you break even?” How much money did you make last year?” and connect with a handful of owners. Not so fast!
Like any small business owner, franchisees have good days and bad. Many entrepreneurs don’t really have a handle on the business’ net proceeds. Sure they understand top line gross sales as well as how much net proceeds they see each month/year, but that is a far cry from the profitability of the franchise. Depending on how franchisees are structured, what “non-business” expenses they write off in the business, whether or not they take a salary form the business, etc.; can greatly affect the net income from operations.
HAVE A STRUCTURE APPROACH
Try to find a franchise concept whose franchisees seem forthright and open and one that has a structure process to guide you through this most important due diligence step. At FirstLight, we have a series of tools and recommendations when speaking to franchisees (Validation) that helps the potential franchisee gain valuable information in a timely manner.
KEEP THE DATA IN PERSPECTIVE
No franchise has happy franchisees all the time! Whether a concept has 10 franchisees or 1,000, they are bound to have certain percentages, who are just not happy with their decision. Those franchisees should look to sell their franchise (another future blog perhaps!). Every franchisee has ups and downs in the business, especially in the first 12-18 months. Depending on what day you connect with them, you might get varying feedback. Obviously, in the big picture, you want to hear much more good than bad when speaking to franchise owners, but be prepared for the “good, bad and the ugly”. At FirstLight we encourage prospective owners to hear all of the above, so that if they choose to start the business, they will go into the venture eyes wide open, with no misconceptions.
DON’T BE AFRAID TO PROBE A LITTLE
If you hear something out of the ordinary from a franchise owner compared to other owners you have spoken to, it’s ok to probe in a professional manner. For example, if a franchisee says they work 24/7 or can’t get a handle on operations, ask them a few follow up questions: “Are you staffed according to the franchisor’s model?” “What role do you pay in the model?” “Did you recently have turnover in your business?” More often than not, you’ll uncover 1-2 things that this particular franchise owner is going through or not following the model that is causing some discontent.
VALIDATION IS KEY
Speaking to actual owners in a franchise system is a critical part of the due diligence process. With a structured, open-mined approach, you should do just fine in finding the “right” franchise model for you!