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Not All Franchises Are Created Equal

by Ed Teixeira

Although there are significant differences among hundreds of franchise opportunities some of these differences are more critical than others. Franchise candidates need to know how to spot these differences.

It's a given that among the approximately 2,400 franchise opportunities in the United States there are differences that go beyond the type of business, the franchise represents. Most of the differences are readily apparent and include the required investment, size of the franchise, etc. However, it's not the more obvious differences that franchise candidates need to be aware of but rather those that don't receive attention.

There are two initial qualifiers that people use when considering a franchise opportunity, the amount of investment and the type of business sector the franchise operates in. Once determined the next step is to identify the franchise opportunities that fall into the specific group. After this step, things can get a bit dicey since the comparisons among franchises usually conform to the same areas; namely, what is the actual investment required, length of the franchise term, how many franchises in operation, territory size and what are the royalty and ad fund payments. Moreover, there is no shortage of advice when it comes to investing in a franchise opportunity, from sites like the Internet franchise books, articles and the FTC.

When evaluating several seemingly comparable franchise opportunities, the following represents some areas that deserve attention:

1. How long has the franchisor been in business? How long have they been franchising?

2. Reviewing Table 20 in the Franchise Disclosure Document identify the number of new franchise locations added over the 3 years shown.

3. From Table 20 identify the number of franchisees that were terminated, ceased operations and were acquired by the franchisor. ( A franchisor acquisition can be used by a franchisor to avoid litigation by paying a franchisee a small amount for the franchise) If the total number of franchisees that left the system for these reasons is greater than 5% of total franchises in operation, it could be a red flag.

4. Review the franchisor financials and see revenues from initial franchise fees and on-going royalties. Unless the franchisor is fairly new or in the early stages of growing initial franchise fees being equal to or greater than royalties can indicate a system more concerned with selling new franchises, than developing the overall network

5. How often are royalties and add fees paid to the franchisor? Almost 60% of franchisors collect royalties on a monthly basis, which is a benefit from a cash flow standpoint. Paying royalties more frequently reduces available cash.

When considering a franchise opportunity it's important to focus on those areas that can vary from franchise to franchise. In other words, not all franchises are created equal.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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