But Should I Really Invest in Your Franchise?

Deciding whether or not to invest in a franchise as a franchisee involves calculated, well-educated risks. To help eliminate core chunks of guesswork, jumpstart your research and ultimately make a more sound decision, the International Franchise Association (IFA) addresses five key risk variables to consider when searching for successful franchise investments.

Ed Alberts, WIRED National owner and savvy entrepreneur of two decades and counting, elaborates on the five points to provide a more thorough understanding of each concept.

Franchisee Turnover:

“When looking at the Franchise Disclosure Document (FDD), turnover information is usually detailed in the exhibits portion of the report. There will be a list of current, operating franchised outlets and another list of the franchisees that were terminated or closed within the system. Review the brand’s last 5 years to get a better sense of their performance.”

Franchisor Revenue Generation:

“What you can see sometimes in Item 19, which is the Financial Performance Representations, is a general idea of where you’ll be as far as revenue goes. But every site is different. I think the best thing to do is talk to franchisees that are in the system you’re considering entering into. Because typically the sites aren’t in the same location as you, they’re more open to sharing where they stand revenue wise and mistakes they’ve made that have maybe affected their revenue. From those franchisees, you can learn what to predict from revenue. It all comes down to finding out the minimum and the maximum numbers of revenue to figure out if you can break even.”

Franchisee Growth:

“Franchise growth depends on the franchise store’s maturity. You would hope to see an upward trend for a young franchise with notes including open outlets, states they’re located in and how long they’ve been around. At that point, when you see the trend that is positive and growing, as a potential investor, that gives you a good feeling. You’ll also want to look closer at the list of franchisees that have left the system; if that number is very low or none, you can have some confidence that the sites that are opening are successful.

Now further down the line in maturity with a larger sized franchise, you just want to make sure there aren’t a lot of people leaving that brand. Early on you can have explosive growth but if a couple years after the fact people are leaving then there’s an issue with the system that is put in place.”

Item 19 Disclosure:

“When you flip through FDDs, you’ll see a wide range of what is in that Item 19 and as somebody new getting into the franchise, don’t automatically think you have a great location, that the system is going to be wonderful and you’ll be at the high end of their projections. Some companies won’t even make Item 19 projections. That’s neither good nor bad, you just have to do your homework and reach out to franchisees. Don’t just talk to successful franchisees. Talk to new franchisees that have opened up in the last couple of years, older franchisees that have been opened for more than 5 years. You want a wide range. I want to talk to franchisees that are located in the bottom third to see if they’d make the same investment again. I understand this section gives you the financial disclosure, but to me, it’s something you don’t put a lot of weight on. You need to talk to franchisees and take the emotion out of it. 'This is going to be a new thing for me. This is what I’m going to do for the rest of my life and pass it down to my children.' Take the emotion out of it and understand the numbers before you make the jump into it.”

Executive Team:

“With franchises that are just starting up and relatively new, they may not have a well-developed team in place yet. If a franchisee becomes part of a brand in its infancy, the franchise’s executive team may not have acquired enough expertise. In this case, franchisees may have to actually help flesh out guidelines and concepts. If you have experience outside of the franchise world at running a business, the executive team isn’t that important to you as you already know how to identify location analytics, projections, budgets and financing.”

Key Takeaway:

“I think the IFA’s list is a pretty good launching pad, but I believe you also need to consider where this franchise is going. Where is it location wise? Not all franchises do well in all locations. When you think about it, you kind of need to have areas in mind to run analytics in those locations ahead of time to see if your targeted demographic is there and will support that particular brand. You can have a great franchise in a terrible area – you won’t do well. And sometimes just the opposite can occur. You need that information in advance to see if the brand will even work where you want it to.”

Do you have more franchisee-related questions? Send them through to info@wiredtelcom.com and you may just see them in our next blog post!