Owning a franchise makes you an entrepreneur, a small business owner. While no guarantees can be made in any business venture, franchising is one of the safest investments you can make to succeed as a small business owner.
Determining the level of safety among the handful of franchise opportunities you may be interested in can vary. Mega chains like Subway have a proven track record of success; smaller systems on the other hand may not have the same level of consistent success. Of course, there is never a guarantee you will succeed as a franchisee, regardless of the size of the concept.
There are a number of ways you can assist yourself in making the best decision when it comes to investment safety:Expansion Rate: How quickly is the franchisor growing? Steady growth year after year is a good sign that the franchisor’s management team has developed a strategic growth plan. If the system is less than five years old, make a note of how many franchises have been opened during this time frame. High fluctuations year after year can be an indicating of unstable operations.
Geographical Coverage: Is the franchisor growing locally, regionally, nationally, or internationally?
Geographical expansion should only be taking place after the franchisor has established a solid base of franchises central to its head office operations.
Franchise Closings or Resales: How many franchises have closed or been resold in the last five to seven years? While there is no formula to determine the safety of a franchise based on the ratio of openings to closings (or resales), you should track how many original franchisees have shut their doors or sold their business year after year. You will find this information in the UFOC.
Franchisor Financials: When you receive your franchise agreement you will also get the franchisor’s financial statements. Your accountant can help you determine the financial stability of the franchisor. The balance sheet is a key document in this package of financials. If the franchisor is a public company, you can do your own research online, reading any of the published press releases that have been made available.
Justified Fees: When comparing similar franchise opportunities, you should examine the franchise-related fees levied by the franchisor such as the initial franchise fee, royalties, and advertising fund. You should never base your decision to buy on the franchise opportunity with the lowest fees but you should question if there are excessive discrepancies. A franchisor with very low fees compared to a competitor requires further investigation.
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