So you’ve decided you want to invest in a franchise. Where to start? There are about 3,000 different concepts of franchises in the United States, among about 80 different industries! It is often very confusing to find the ideal model for your pocket and that is also aligned with your personal and financial goals!
Several factors should be taken into account in the franchise selection process, for example:
- What is the total capital you are willing to invest?
- Would you be willing to engage full-time or part-time in the business? Some franchises require the owner of the unit to be present in the business all the time, while others are more flexible, and even allow passive ownership.
- How many employees you would be willing to manage? Do you want to manage any employees at all, or would you prefer a model in which you don’t need to manage anyone?
- Do you have a preference for service based businesses (eg. Cleaning companies) or products businesses (eg. restaurants, retail shops, etc.)?
- Would you prefer a home-based type of business, or a store-front concept?
- What are your main skills, and relevant experience that can be applied in a business? Franchisors usually look for candidates who have a specific profile for partnership.
And so on, there are many variables and many options, and if the choice is not made with enough discretion, you could end up investing in a business that is not aligned with your long-term goals. It is critical to weight in all the questions above when investigating franchise concepts.
For example, someone might be thinking about opening a typical fast-food franchise, because of the known brand and low effort to attract customers. But at the same time, the fact that a fast food franchise is open 7 days a week, has high employee turnover, very low profit margins, and need to sell a humongous number of items just to break-even, are not really taken into account prior to the decision. Many times, the person desiring to open a business wants something profitable but with low overhead and a business that provides good work-life balance. So a fast food chain might be the wrong type of business, and a service-based model, for example, could serve the need much better!
Here are some of the most common mistakes to be avoided when selecting a franchise to invest in:
- Choosing a concept that does not meet your desired lifestyle: It is important to be careful not to choose a model that will not fit your desired lifestyle. If you are looking for more work-life balance and flexible hours, there are many models that allow that, but many don’t. So this needs to be investigated carefully during the investigation process;
- Not reading carefully the franchise disclosure document: every franchise is legally required to share a FDD (Franchise Disclosure Document) with their prospect candidates, and give them enough time to read through it. However, some candidates don’t give this document enough attention. The FDD is a very important document that discloses a lot of valuable information such as starting and ongoing costs, if there is any history of lawsuits, financial statements, list of all franchisees in the network, etc..
- Not seeking legal advice: investing in a franchise involves dealing with legal documents and it is highly recommended that you get assistance from a franchise attorney. Franchise attorneys are knowledgeable on the language of FDDs and other franchise related documents, such as the Franchise Agreement. They can help advise if there is anything out of conformity or too deviant from the typical industry standards;
- Not performing enough due diligence: during the franchise investigation process there are many opportunities to obtain all information needed in order to make an informed investment decision. That includes a series of phone calls with the franchisor (specialized by topics such as: company overview, training and support, operations, sales and marketing, etc), ability to contact the franchisees and ask them questions, a discovery day which involves visiting the company’s headquarter, meeting the team and learning even more about the business. It is imperative to take advantage of each one of these learning opportunities and gathering as much information as you can;
Working with a franchise consultant
Franchise consultants specialize in helping new investors select the ideal business model for them, and follow a structured selection process which includes an initial assessment, to understand the investor’s long term goals, areas of expertise, ideal business model and industries, and investment budget. Based on the assessment, they perform a rigorous search on a database of hundreds of franchises, looking for concepts that meet their client’s criteria determined based on the assessment. Then, they select the concepts that best meet their client’s goals, and help them during the investigation process.
Franchise consulting companies have contracts with hundreds of franchisors who utilize their services to assist them in finding pre-qualified candidates who meet their selection criteria for new franchisees in their network. They are trained by the franchisors on their business models and what types of candidates they are looking for. For franchisors, working with consultants is a much more effective way of finding the right candidate, rather than going solo, spending large budgets in marketing, and having to screen through hundreds of candidates to find the qualified ones.
The service provided by a franchise consultant is free for the candidate investor, since the franchising companies pay a commission to the consultant if and when the introduction of a qualified candidate results in the establishment of a new franchise in their network.
For more information about the franchising industry, and assistance with franchise selection, contact us at: email@example.com,
Phone: +1-760-607-6584 / +1-760-607-6585.
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