Not All Franchises Are Created Equal
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