Trying to choose a franchise? 9 tips to consider

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Do your homework before you put on the apron.

© robertsre, Kenishirotie/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

You’ve thought long and hard about the pros and cons of buying a business franchise, and you’ve decided that it’s what you want to do. You figure you have the time, business savvy, and you’re pretty sure you have the capital (and courage!) to get started. So, what’s next?

Not only are there numerous brands to consider, from local to national and less-known to popular, but they’re also spread across a wide range of industries, from gas stations and fitness centers to coffee shops, fast-food, and sit-down restaurants. Last but not least, the start-up costs and guidelines (and restrictions) for each franchise can vary widely.

Choosing the right type of franchise can be tricky, so here are nine tips to consider. Some of them you’ll want to consider before the big “discovery day,” when you’ll have the opportunity to meet with franchisors (and other key members) to evaluate your best franchise fit.

First off, you should select a business that can sustain your interest for the long haul, because owning and operating a business is a long-term investment. Industry know-how and skills help, too, but if you have the right aptitude and interest (and better yet, if the franchisor offers a training program), you’ll pick up a lot of the necessary skills as you go.

The franchise disclosure document (FDD) is a huge information dump divided into 23 sections that more or less cover everything you need to know about becoming a franchisee—from initial costs and the franchisor’s financial performance to its trademarks and restrictions. It’s an all-encompassing rulebook, guidebook, and, in a way, an almanac for the franchisor.

There’s plenty of value in talking to other franchisees, franchise consultants, and financial and legal professionals when assessing the various aspects of a franchise purchase. Buying a franchise is a huge investment decision. It’s probably best done with professional guidance, particularly if you don’t fully understand the FDD.

When you gather a list of franchise prospects, take a look at their general initial investment costs. Some can start as low as $5,000, as is the case for many cleaning service franchises. On the higher end, some big national brands, like McDonald’s, not only require millions of dollars to get started, but also a high net worth of non-borrowed capital. In this case, going into debt is not an option, although you could partner with other investors.

Every commuter rail station needs a coffee shop, right? Yes, but if it already has five, adding a sixth might be a tough sell.

A franchise might have a strong brand and business plan, but that won’t mean much if there’s very little demand for the product in your local market. Similarly, a weak brand in a saturated market might get drowned out—initially, at least. This is where owning a company 100% (versus franchising) may have its advantages, because you can tweak the brand, products, and processes to tailor it to the local market. As a franchisee, however, you’re limited from the get-go.

Do your market research, understand your target demographics, and evaluate the market’s level of competitiveness and saturation.

The franchisor will likely include a standard business plan in its FDD. Take a hard look at the business model and growth strategy. Also, read up on the company’s financial statements (particularly its balance sheet and income statement).

Look for revenue growth and earnings growth, and run the numbers through various financial ratios to make sure the company’s financial health is favorable. Talk to other franchisees or industry insiders (such as franchise consultants) to help determine whether your prospective franchise is as promising in reality as it appears on paper.

Here’s something that might not be apparent in an FDD: the company’s competitive positioning across the broader market or industry. Whether a brand is a small contender or a well-entrenched titan, you’ll want to get a big-picture view of its competitive advantages, unique value propositions, and anything else that might give it an edge over its competitors.

It isn’t easy to conduct comprehensive research on market or industry trends, but it’s the only way to assess your franchisor’s potential for growth and sustained profitability.

Are the franchising fees and/or royalties favorable and sustainable? Can you work comfortably within the franchisor’s guidelines and fulfill your contractual obligations? It’s not just a question of your available capital—are you getting enough bang for your buck? If not, you might consider a different franchise opportunity.

There’s a big difference between cooking burgers on your stove and running a team that’s operating a dozen modern, commercial-grade appliances. And how do you manage personnel, build schedules, stay current on state laws and health codes, and keep track of inventory?

Does your franchisor provide training, operational guidance, marketing assistance, or any form of ongoing support? These additional perks can be helpful, especially if this is your first franchise. Also, you’ll want to know how helpful the training and support have been to other franchisees. Be sure to talk to a few.

Choosing the right franchise can be a long and laborious process. From selecting a business that matches your interest and skills to determining a franchise’s growth potential in your local market, there’s plenty of homework to be done before the actual grind begins.

But if this is the kind of venture you want to pursue, then a slow, steady, and strategic approach may be well worthwhile. Also, don’t forget to consult fellow franchisees and other experts before making a purchase. After all, the point of buying a franchise, versus creating a business from scratch, is to go into business for yourself but not necessarily by yourself.