Comparing Business Opportunities
Factors To Consider When Comparing Franchise Opportunities?
Buying a Franchise is a complex and long-term investment; and, if you are like most first-time Franchise buyers, it will be one of the biggest investments of your life. As a result, the decisions you make during the buying process are extremely important. And this starts with deciding which Franchise opportunity you decide to pursue.
There are many options. There are thousands of Franchisors operating in the United States currently, and hundreds of new brands start franchising each year. Not all these options will be relevant to you. In fact, once you decide what type of Franchise you would like to own, and start looking into geographical availability, you will begin to get a feel for which Franchised brands resonate with you and which ones don’t. You will soon find yourself trying to decide between just two or three Franchise Systems.
While narrowing down your options from thousands is easy, you will soon find that narrowing down your options from two or three to the final one is a different task altogether. All Franchise Systems are not alike; and, while Franchisees are independent business owners, their success sometimes depends heavily on their Franchisors in a variety of different ways.
From the fees Franchisors collect, to how much they require their Franchisees to spend on advertising, to how vigorously they protect their brands, many of the business decisions Franchisors make have a direct impact on their Franchisees’ businesses as well. As a result, if you don’t make an informed decision, you could very well find yourself struggling to make it as a Franchisee.
With these factors now coming to light when buying a Franchise, how do you make an informed decision about which Franchise opportunity to pursue? Here are
some crucial factors to consider once you have narrowed your options down to two three Franchise opportunities.
Initial Investment
The initial investment is the total amount of money you will need to establish your Franchise and open for business. The initial investments vary widely between types of Franchises.
Each Franchise Opportunity has their own Initial Investment. These Initial Investments can range from as low as Fifty Thousand Dollars and as high as a Million or more.
It is important to determine what your Initial Investment covers. There are some Franchise Opportunities that include more and others that include less. Some Franchisors will nickel and dime you after your Initial Investment. Other Franchisors will ensure that you have everything you need to begin running your
business.
Franchisors that include more products and services for your Initial Investments should weigh heavily on your decision.
How To Compare Initial Investments
In order to compare initial investments, you can review Item 7 of each Franchisor’s Franchise Disclosure Document (FDD). Depending on the Franchises you are seeking to compare, you may also be able to find initial investment information online. When comparing Franchisors’ Item 7 disclosures, there are many factors
you will want to keep in mind, including:
• Franchisors’ Item 7 figures are estimates only, and you will need to independently assess your costs to open a Franchise.
• Not all Franchisors include the same costs in their Item 7 disclosures. When comparing initial investments, make note of line items that only appear in one franchisor’s FDD.
• A significant portion of the Item 7 initial investment estimate is the “Additional Funds” line item. This is an amount that is intended to cover your expenses during the opening phase before your Franchise becomes
profitable. You will need to read the footnotes to the Item 7 table in order to determine what period this line item covers.
Franchisors that offer More Affordable Initial Investments should weigh heavily on your decision.
Royalties And Marketing Fees
Once you open for business, you will need to pay royalty and marketing fees to your Franchisor on an ongoing basis. Most Franchisors calculate their royalties and marketing fees as a percentage of gross revenue and require Franchisees to pay monthly. However, there are some exceptions, and you will need to carefully review Item 6 of the FDD to determine the ongoing fees associated with each Franchise opportunity you are considering.
Franchisors’ royalty fees will generally range between 5-10% of Gross Sales. Some Franchisors charge minimum fees as well, which means that you must pay a certain dollar amount regardless of your Franchise’s revenue for the month.
In addition, some Franchisors require their Franchisees to pay “Lost Future Royalties,” which means that if your Franchise goes under, you must still pay what you would have owed had your Franchise been successful. This has the potential to be financially devastating.
Technology Fees and Marketing Fees are very standard fees. Without Technology Fees and Marketing Fees, it is almost impossible to grow your business and be competitive in today’s market.
Franchisors that have Technology Fees and Marketing Fees that will ultimately help in growing your Franchise should weigh heavily on your decision.
Territory Rights
Most Franchise Opportunities come with a territory. What it means to be granted a territory as a Franchisee depends on the specific terms of the Franchise Agreement. Some Franchisors offer “Exclusive” territories within which no other Franchisees are permitted to sell their goods or services. Others, however, simply restrict the geographic area in which Franchisees can spend their marketing dollars.
Franchisors that have Exclusive Territories should weigh heavily on your decision.
In order to determine what type of territory a Franchisor offers; you can review
Item 12 of the FDD. However, it will be important to review the relevant terms of
the Franchise Agreement as well, as the Franchisor’s Item 12 summary may not
fully describe the restrictions that apply to Franchisees’ territorial rights.
Initial Term and Renewals
When you purchase a Franchise, your rights are not unlimited in duration. Your Franchise Agreement will specify an initial term, and it will provide a list of conditions that you will need to satisfy in order to renew your Franchise. Agreement when the initial term expires.
Franchisors that offer multiple renewal options should weigh heavily on your decision.
As a Franchisee, what you do not want to do, is work on building your business for two or three years, only to have your Franchisor refuse to renew your Franchise Agreement. At this point, you might not have even earned back your initial investment. As a result, it is generally better to have a longer initial term rather than a shorter one.
Franchisors that offer Longer Franchise Terms should weigh heavily on your decision.
Operational Restrictions and Support
When you buy a Franchise, what are you paying for? In most cases, you are paying for two things:
1. The right to use the Franchisor’s trademarks; and,
2. The right to use the Franchisor’s business system and receive operational support as a Franchisee. If you need support and you can’t get it, you are not going to be satisfied, and you are going to wish that you had chosen a different Franchise.
Another factor to consider is the extent to which each Franchisor restricts its Franchisees’ operations. You can get a sense of this by reviewing Items 8 and 11 of the FDD, and also by speaking to current and former Franchisees of each system.
While you want to know that your f\Franchisor will offer and enforce system-wide standards to establish uniformity and foster customer loyalty, you also need to make sure that you will have the flexibility you need to run a successful business.
Franchisors that offer multiple support options and substantial ongoing training should weigh heavily on your decision.
System size and growth
While bigger isn’t necessarily better in franchising, there is certainly something to be said for a franchisor being able to build and manage a nationwide system with hundreds of Franchisees who are (mostly) able to stay in business for multiple years. At the same time, there can be advantages to joining a fledgling Franchise
system as well—as long as the franchisor has the personnel and financial resources needed in order to grow the system effectively.
When comparing Franchise opportunities, it is a good idea to spend a decent amount of time reviewing Item 20 of each franchisor’s FDD. Item 20 contains multiple tables (with footnotes) that describe Franchisee signings, openings, closings, and terminations. Item 20 must also contain a state-by-state list of projected openings, and you can speak with each franchisor’s representative to find out if they are on track to meet or exceed their projections.
Post-termination covenants
In addition to the possibility of facing liability for “lost future royalties” as discussed above, as a prospective Franchisee, it is important to be aware of any other post-termination covenants in your Franchise agreement as well. These can vary widely from one Franchise system to the next, so you will want to carefully review the termination provisions of the Franchise agreement for each Franchise opportunity you are considering.
Non-competition and non-solicitation covenants are both fairly standard, although some Franchisors attempt to impose restrictions that are far more stringent than others. You can also expect to have to stop using the franchisor’s system and trademarks promptly, although you may be able to find some short-term leeway here as well.
Do your due diligence
This list is by no means exhaustive; and, before choosing a Franchise and signing a Franchise agreement, it is critical to conduct thorough due diligence and reach a sound decision that is based on your personal belief in your ability to succeed. Make sure that you develop a business plan to help you navigate your decision and
ensure that your Franchise choice can be successful.