There are numerous books, articles and blogs that provide advice on how to evaluate a franchise opportunity. A common thread that runs through is the recommendation that before a prospective franchisee invests they must review and validate the information disclosed in the Franchise Disclosure Document and obtain feedback from franchisees. This approach is an effective way to evaluate a franchise and when coupled with the assistance of professional advice can be an effective way to evaluate and protect your franchise investment. However, to complement this approach I would advise prospective franchisees to dig deeper into the franchise and gather more information.
Looking beneath the surface
The approach I suggest is to gather information and data that provides a more accurate description of the franchise opportunity and system performance.
- Focus on Item 19. Our research has indicated that the most successful franchise systems disclose more financial information in their Item 19 and don’t limit it to just revenues. If there is no Item 19 you should walk away, unless it’s a new franchise. In that case you’d want to see corporate financial information.
- Review the Franchisor’s financial statements. The franchisors financial statements can provide a deeper look into the franchisors operations. This includes the franchisor’s financial performance, source of revenues, liabilities and source of capital. The more mature the franchise system the more information that will be available to review.
- Ask franchisor staff about their franchise competitors and how they compare. These questions can provide a way to learn how forthcoming the franchisor staff will be. In many cases a franchisor will present anecdotal information to support their responses rather than presenting statistical based information. Franchise Grade provides various ways to access this data.
- Territory. Identify how the franchisor identifies territories, defines the boundaries and what demographics they use.
- Litigation. Some litigation may be necessary by the franchisor to protect the brand against a franchisee, but a healthy franchisor should be resolving disagreements without resorting to legal action. This is another area where a comparison to similar franchises can provide insight into the franchise you’re considering.
When evaluating a franchise opportunity, it’s important to get as much facts as possible. In most cases this means digging deeper.