Thinking About Owning A Franchise? Do Your Due Diligence Before Committing

Owning your own business is a dream many people have. The freedom to be your own boss and to control your own destiny is a strong lure, especially in an ever-changing business environment where loyalty and commitment seem to be a thing of the past.

There are many reasons people decide to step out on their own and leave the employ of others. Some are following a dream, while others may be frustrated with the direction their career has taken them. No matter what the reason, franchise ownership may be one of the considerations people make when deciding to go it alone. Interestingly, the draw of a franchise, as opposed to starting from scratch, is that you don’t have to go it alone. A good franchise opportunity should be as close as possible to a turn key operation. And, if you pick the right franchise success should be all but guaranteed. That is as long as you are disciplined, do your due diligence and fact finding, and properly implement the established systems.

To Fail or Not to Fail

When a franchise fails it usually because the franchisee failed. Franchisees either failed to do their due diligence up front (which includes a professional review of the Franchise Disclosure Document), failed to properly implement the systems and processes that the franchisor has established, or they fail to attend to the factors that contribute to success, like local store marketing, customer experience, operational excellence, and attention to quality. These failures are many times blamed on the franchisor when in fact they are more appropriately placed at the feet of the franchisee.

Consider This…

If you are contemplating stepping out on your own and investing in a franchise, consider the following before you go all in. Remember, it’s better to go slow before you go fast and furious into franchise ownership. If you do slow it down, you may thank yourself later. If you don’t, you may hate yourself in the morning. Either way, going slowly through the process is almost never a bad idea.

10 Things You Need to Understand Before Signing on The Dotted Line

  1. Product Offering and the target customer: ask the franchisor to describe their products in detail, who they view as their target market, and what, if any, product offerings are in development.
  2. The “ideal” demographic: ask the franchisor to share the ideal demographics for a successful location. If they can’t give that to you then you should be concerned. If you still like the franchise, then do your own research and visit franchise locations in the region you are considering. Conduct interviews of owners and general managers so that you might uncover what the ideal demographic may be. If the franchisor does have the data, and they should, ask how they arrived at the data and what the regression analysis indicate.
  3. Development area demographics: Ask the franchisor if they will help you determine the demographics of the geographic area you are interested in and determine the size and density of the target population.
  4. Operating costs: ask the franchisor if they can help you determine the cost of rent, employees, and supplies/materials for the area you are considering and compare that with anticipated pricing for your product. Then, ask them if they have a pro forma so that you can try to determine margins using data for your area. No two areas are the same, even if they are only 30 minutes apart. Excessively high rent and employee costs can destroy a franchise. Then, go interview other franchisees and find out how they are performing. You need to confirm what you think the possibilities are. DO NOT let your emotions make this decision.
  5. Support: ask about all the services and support you will receive from the corporate office. Much of this information is contained in the Franchise Disclosure Document.  However, asking the right questions will provide greater detail and a better understanding. This will better prepare you for opening and prevent misunderstandings in the future.
  6. The best of the best: ask for a detailed description of the characteristics and behaviors of the most successful franchises. There are things that the best franchises religiously do that the less successful franchises do not. Find out what they are and then map a plan for making those characteristics a part of your franchise.
  7. 5-7 things: ask the franchisor what 5-7 things have been determined to be those things that result in increased revenue and customer satisfaction.  You may hear things like “engaging the customer when they walk through the door”, “offering to enroll customers in our rewards program”, or “addressing customers by name at checkout, which is gained from their credit card or through our rewards system”. Knowing what those 5-7 things are says a lot about the franchisor and how well they know their operations and customer.
  8. Marketing (yours and theirs) – ask them to explain what makes up corporate marketing and what makes up local marketing and what costs might be hidden. The two are not the same. Know where the money is spent and where you need to spend money locally. A satellite franchise may realize little to no corporate marketing until other locations are developed nearby. You need to know this up front.
  9. Their opinion: ask their opinion about where they would like to locate a franchise and why. Maybe you’ll find that their location is better than yours. It also tells you how much work they’ve done preparing for growth. It also says a lot about the direction they are heading.
  10. Strategic vision: find out the strategic vision of the corporation. Ask about their vision, corporate values, goals, growth plans, product development plans, and mission statement. Quality organizations will have a well thought and detailed strategy that maps out the direction of the organization. A vibrant corporate brand will only help make your local brand more attractive.

Know It All

You can’t learn everything you need to know in a few meetings. However, by asking the right questions you can learn a lot about the organization and what you can expect in the future. Remember, the benefit of owning a franchise is that someone else has figured out the success formula. While franchise ownership does not guarantee success, if you do your due diligence and implement their systems you should be better positioned than trying to go it alone. Never forget that your success or failure is directly tied to your willingness do what needs to be done to make it happen. Due diligence is the first step in that process.

Randy Stepp is a business and franchise development consultant who’s purpose is to help business owners realize their dreams of independence and freedom.

Follow or Connect with Randy on LinkedIn at https://www.linkedin.com/in/randystepp