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Evaluating a franchise opportunity: 5 red flags

By FranChoice Blog | Jul 17, 2019

evaluating a franchise

When evaluating a franchise, it’s critical to research every opportunity very carefully. Do you know how to spot indicators of potential problems? Be particularly cautious when you encounter any of these issues:

Evasive or unprofessional franchisor

When evaluating a franchise, it’s your job to ask questions and scrutinize responses. If the franchisor is evasive, unprofessional, or aggressive, consider it a sign you should look elsewhere. If they’re not courteous and cooperative during the sales process, there’s little chance they’ll be any easier to deal with when you’re a franchisee.

Unhappy franchisees

What should you do when evaluating a franchise where many of the current franchisees seem dissatisfied? The safest move is to move on to other opportunities. It’s preferable, of course, to find that the franchisees you speak with are satisfied with their business, its financial results, and the value they receive from the franchisor.

Franchisee turnover

The due diligence process for evaluating a franchise includes review of the Franchise Disclosure Document (FDD). The franchisor must disclose the history of franchisees who have left the system and the reasons they did so. A high rate of turnover can be a red flag. You’ll need to determine whether it means that the business is not consistently successful at the unit level.

During your research, differentiate between units that close because the owner could not succeed and units that the owner sells as an exit strategy. How long has the franchise been in operation? In a younger franchise system (i.e., active for only 5-10 years), any significant turnover should be carefully explored. If the turnover is a result of the termination of franchisees, this indicates a problem. Turnover due to resale of successful units is another story.

Litigation history

Check the FDD to see whether the franchisor has a history of litigation. As a general rule, more than one or two cases per 100 franchisees could indicate a problem area. Look at the contested issues to distinguish, for example, actions brought by the franchisor against franchisees who aren’t paying their bills versus those brought by franchisees alleging misdeeds by the franchisor.

Too good to be true

There’s a good reason for this old adage: if an opportunity seems too good to be true, it probably is. If a franchisor is unwilling or unable to recognize and disclose the flaws in their business (every business has them), be forewarned. Transparency is a good thing, and that means telling prospective franchisees about the challenges as well as the benefits.

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Franchise startup costs: where to find savings

By FranChoice Blog | Jul 3, 2019

franchise startup costs

When you’ve signed on the dotted line and you’re a brand-new franchise owner, it’s time to think about franchise startup costs. You might be surprised to hear that the biggest money-wasting startup cost is really just part of human nature: impatience. Most new franchisees are understandably excited to get to the ribbon-cutting and open their business. When presented with multiple options they choose the speedier one, which usually comes with a higher price tag. But when several expensive (but speedy and convenient) options are chosen, the cost adds up. And in many cases, the time gained doesn’t produce enough long-term value to offset the increased cost. You’re likely wondering how to solve the cost vs. speed quandary. The answer is simple: balance. Don’t lean too far to the cost-saving side or the speed/convenience side of the fence.

There are several common expense categories that most startup savings fall into. “Time is money” applies to most of these areas. Here’s where to look for savings:

Lease terms

This category of franchise startup costs can bring significant savings, so it’s wise to gather expert advice. Consult a good commercial real estate agent and an experienced real estate attorney familiar with the local market. All leases are negotiable to some extent, but through skilled negotiating you may be able to obtain significant concessions. With your realtor and attorney, you can determine what’s standard in your marketplace in terms of variables like the costs per square foot, the Common Area Maintenance (CAM) charges, free rent periods, construction allowances, and other terms. Then you’ll have a point of comparison as to whether you’re getting a good deal.

Construction costs

Most franchises require a physical site that needs to be prepared according to specifications. There are a two basic ways to save money here. First, get multiple bids for work that needs to be done. You’ll be surprised at the cost variance you’ll see between contractors. Second, put some thought into DIY. What might you be willing to do yourself in order to save money?

Equipment, signage, and fixtures

This category of franchise startup costs represents a significant expense for most franchises. Again, it’s worth your time to get multiple bids on everything. In terms of your equipment, think about buying used components. Some franchises will not allow that option, but most will allow you to source and purchase used equipment as long as it meets particular guidelines. Ask your franchisor about good sources in the area.

Insurance

A lack of sufficient insurance coverage could bring down your business, so it’s best to get as much business insurance as you can reasonably afford. Sit down with your insurance broker and have them shop around to get the best deal. There can be surprising differences in rates for the same coverage by different insurance providers. Increasing your deductible is one option to reduce your premiums. But make sure your deductible is not so high that it would be unaffordable for your business if you had to make a claim. Upgrading your location with fire alarms, sprinkler systems, and/or security systems can make you eligible for insurance discounts. The lower your risk from the insurer’s point of view, the lower your premiums are likely to be.

As a final thought on this topic, remember that it’s not hard to determine which areas will produce the most savings, whichever franchise you select. All you need to do is ask current franchisees. The time you’ll invest in making these contacts will be an investment that can pay big dividends in startup savings.

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