Buying a Franchise through the Eyes of a Franchise Expert
by Ed Teixeira
After having been involved in franchising for almost my entire business
career my knowledge of franchising qualifies me as an expert. Through my
experience and expertise I feel that I知 in a unique position to give useful
tips regarding how I would evaluate a franchise opportunity.
We値l begin by making three assumptions about my buying a franchise:
- Assume that I致e already identified a
franchise opportunity that fits my personal, business and financial profile and
my application has been approved.
- I have obtained a copy of the Franchise
Disclosure Document and confirmed that it痴 current and if required, properly
registered in my home State.
- I値l use a trusted friend or advisor to
provide objective advice and counsel. Often a third party that is not directly
involved can offer a perspective or opinion we might not consider.
Following are the key areas that I would focus on:
- Gathering as much data on
the sales potential of the market/territory I値l be operating in. I want to know
as much as possible about my market, especially future potential. I値l use every
resource available including demographic data from the Census Bureau, Commerce
Department, competitive information and I値l contact local business groups such
as the Chamber of Commerce. I値l also request market information from the
franchisor regarding the rationale for defining a territory. The type of
response and quality of the information I receive from the franchisor can be a
deciding factor in my decision to purchase the franchise.
- I値l test the math
regarding franchisee gross margin and the relationship to the royalties. My
concern is that the gross margin I can earn bears an equitable relationship to
the fees I値l pay the franchisor. I don稚 want to pay an 8% royalty if the gross
margin percent is in the 20痴. When I do a break-even analysis this factor will
come into play.
- The requirements and
practice regarding an advertising fund will be of interest. Is the fund fully
operational? Is there more than one ad fund? Some franchise agreements have a
national fund and the requirement that a franchise participate in a local
advertising cooperative. What role do the franchisees play in the
administration and use of ad fund monies?
- I will have my accountant
thoroughly review the franchisor痴 financial statements with a focus on the
source of revenue and any positive or negative trends. My interest will be to
identify the source and level of capital that the franchisor has. Financial
stability is important in terms of the franchisor being able to service and
support its franchisees.
- When I speak with current
and any terminated franchisees I値l want to know how long it痴 taken them to
reach break-even. This is in addition to other questions I値l ask. The
franchisees I speak with should represent a mix of new and older tenured
franchisees. I will ask the franchisor the same question, recognizing I may not
receive a response. I値l use this information when constructing a break-even
- I値l do a thorough review
of franchise relations and litigation history (available in the FDD) by asking
the franchisees if they have had a problem or issue how long it took them to get
it resolved. Who did they speak with? Any litigation in the FDD would need to be
explained to me by the franchisor.
- I will want to meet with
the CEO or President in order to understand their role in the day to day
operation of the franchise. What is their strategy for growing the franchise
network? Do they seem to be the type of person that I could work with?
- I want to carefully review
the qualifications and experience of the franchisors staff. My primary objective
is to confirm that the people I値l rely upon have the experience and maturity to
support my franchise. An important consideration will be the trainer and the
- If I gather the right
information and answers then I値l want to work at a franchise location for a
minimum of 2-3 days in order to fully understand the role of the franchisee and
what it takes to operate the business. If I have to sign a non-disclosure with
the franchisor then I will.
In addition to the above I値l perform a
comprehensive due diligence before I decide to sign the agreement and write
This is the approach and process I would follow if I were going to purchase a
franchise. I could always add more however, this article would turn into a book.
ｩ 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at