Buying a franchise can be easier than starting a business from scratch. A franchise has the benefit of having a proven business model. It also has an established brand image, and can attract customers far more quickly than an unknown product or service. (Read more facts on franchising)
This is, of course, assuming that you have found a ‘good’ franchise. But what is the difference between a good and a bad franchise? Here are some ways to gauge the strength of a franchise before investing your money.
Look at the profitability
Carefully examine a Franchise Disclosure Document to see how much money the other franchisees are making. Look at the middle range (or middle third) which will give you the ‘average’ expected amount of profits. Does it suit your financial goals?
Don’t accept any excuses from the franchisors that the franchisees don’t know how to run their businesses. Whether or not the franchisees are at fault is not the issue. It is a red flag that the franchisor does not recruit well, that the name of the brand may have been tarnished by the ‘bad’ franchisees, and that the franchisor does not give adequate support or have proper operating systems.
Look at the brand stability
Avoid franchises that have made several changes to the brand. This may be a sign that they changing business models or strategies because of decreasing profits.
Ask franchisees for feedback
You need to know if the franchisor takes good care of its franchisees: handles concerns well, addresses questions, respects ideas and suggestions, and generally values its relationship with them.
Ask about the franchise’s corporate structure
Is the company run by efficient and competent people, or is the company structure populated by family members? You may also want to do web searches on the names of the key management to find out if they have a good corporate track record and a reputation for ethical and reliable leadership.
Also ask about employee turnover, especially the upper management. If they’ve changed CEOs or Marketing Directors or Finance Directors several times since the company started, then that’s a sign of conflict and unstable structure.
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