How to Evaluate a Potential Franchise Opportunity

Every franchise opportunity is different, and you have to consider several factors before deciding to invest in one. As experts in franchising and franchise businesses, we recommend carefully considering and evaluating the following criteria before becoming a franchisee.

The market

Most first-time franchisees opt for international franchises like McDonald’s, KFC and Burger King, as they have a proven track record of high performance in many regions. However, simply because a franchise fares well in other areas doesn’t mean it will work in your local region. Granted, the franchise may still bring in profits, but other franchise opportunities may be more profitable in your area.

Carry out extensive research to identify how certain franchises are performing in your local region. Although it’s impossible to know how successful a business is likely to be in a specific area, you can easily make an educated guess by analysing the demand for the franchise’s products/services in your local area. For example:

  • Is the demand seasonal or year-long?
  • Is the demand expected to grow in the future?
  • Does the product/service generate repeat business or is it a one-off kind of service?

Similarly, look at how competitors are performing and speak to former and current franchisees to get an insight into their profit margins.

The financials

Buying a franchise is an expensive investment, and you need to be fully prepared and aware of all the costs involved. This way, if you need to source funding, you can start early and take advantage of reliable financing opportunities.

When it comes to franchising finance, there are three main elements to consider:

  • The initial investment
  • Working capital
  • Ongoing fees

Your potential franchisor should tell you how much you need to buy their franchise and provide financial statements from their franchising units. If a franchiser declines to give you this information or make further clarifications, steer clear as the franchise may not be profitable.

Once you know the costs associated with buying and operating your franchise, create your own financial projections to see whether you can stay afloat until you turn a profit. The last thing you want is to run into financial problems that ultimately cause your investment to fail.

The franchise’s history

Researching a franchise’s history, including how long it has been in business, will give you an insider’s look into the company’s performance. You want to work with a franchise that treats you as a partner and has extensive experience. A franchise with a long history is more likely to be well-established and have proven models and strategies, giving you confidence.

However, don’t completely rule out young franchises as they can also offer profitable investment opportunities. Just be sure to conduct your due diligence and weigh the pros and cons of investing in an up and coming franchise. When analysing a franchise’s history, ensure they have a solid reputation for delivering quality products/services because clients value this more than anything.

The restrictions

Franchising opportunities work well because there are rules and guidelines to adhere to as a franchisee. So, it’s essential to read and understand these guidelines and take note of any restrictions and limitations to avoid surprises down the line. The goal is to know what you can and cannot do.

Since most franchising agreements favour the franchisor more than the franchisee, it’s wise to consult with an experienced franchise solicitor regarding your future responsibilities as a franchisee. This way, you can remain compliant with your contract and avoid any adverse repercussions. A solicitor can also flag any potential issues with your contract.

Don’t hesitate to negotiate the terms of your franchise agreement with your franchisor. Good franchisors will hear you out and come up with an amicable solution.

The training and support

The best franchising opportunities invest heavily in the development of their franchisees and the growth of their franchises. Look for franchises providing comprehensive training programs that cover all aspects of buying and operating the franchise. This includes the company’s product range and how to handle franchise finances. Never underestimate the importance of initial training as it brings you up to speed with the franchise’s model and strategies.

Similarly, ensure your potential franchise offers ongoing support at any time. You’re bound to run into challenges at some point, especially if you’re a first-time investor and you want to have an expert on hand to help you navigate any problem.

The exit process

Evaluating your exit process before buying a franchise can seem strange, but it’s a good idea. Things don’t always go as planned, and something might happen that forces you to forgo your franchisee obligations. In this case, you want an exit strategy that allows you to terminate your contract without hitting further problems, such as penalties and fees. You can speak to your potential franchisor about their termination process or review the termination contract with an experienced lawyer.

Business & Finance Articles on Business 2 Community

Author: Joel Bissitt

View full profile ›


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.