With over 4,000 franchises in the US, finding the best franchise for you can feel overwhelming.
Many people acquired paralysis through analysis while searching for the best franchise to own. And who can blame them?
On average, 300 new franchises dipped their toes in the franchise water pool.
In the 1950s, there were less than 50 in the entire US.
Now, according to the Census Bureau, over 300 industries are making up 4,000 franchises.
How do you sift through the muck to find the best franchise for you?
I believe by answering these twelve questions; you can get you to begin to narrow the list down to just a handful. I added a few bonus questions to get it down to just one franchise!
As you answer the twelve questions, you will find exceptions to some. With over 4,000 franchises and 300 industries, it is impossible to have absolutes.
Be honest with yourself on this question. How much money can you invest? How much are you willing to risk? What is your credit score? A credit score under 690 will make it difficult to borrow money. Do you have collateral or investments that you can roll over? Treat looking for a franchise just like you would buying a house. Speak to your accountant, and a lending institution and get an idea of what capital is available, and stay within your comfort zone.
Franchises vary in cost from under $10,000 to multiple millions. However, the majority of franchises are between $100,000 – 300,000.
Home service industries tend to be cheaper while restaurants and hotels are the most expensive.
If your budget is under $150,000, you will probably be limited to a home-operated business. But don’t worry, there are many advantages to having a franchise that does not involve customers coming to you but rather you going to them.
Answering this question may not narrow the pool of potential franchises unless your budget is in the $175,000 – $225,000 range.
Oddly enough, even some restaurants in non-tourist areas have a seasonality. Other franchises, such as mosquito spraying and tax preparation companies, have a specific season, but you will need to pay rent year-round. A prolonged off-season can be an Achilles heel if the busy season is interrupted. The risks are higher when high fixed costs are involved, i.e., lease, utilities, and insurance.
Do any of the franchises you are looking at have a slow season?
As you narrow down the process of finding the best franchise to own, compare the flexibility or quantity of services you can provide. Some franchises, such as brake service automobile shops, may not allow similar services such as suspension repairs. Restaurants are notorious for consistency in every aspect, including artwork placement. If you prefer the freedom to choose, take a close look at the FDD and eliminate the ones that feel too restrictive.
Which franchise on your list gives you the least flexibility?
Which franchise gives you the most flexibility?
How strong is the demand for the franchises you have left on your list? Not in the industry but in the particular franchise. For example, the exercise industry will never go out of business, but a specific exercise regime does. Avoid buying a franchise that is trending.
On the other hand, painting and handyman services tend to be recession and even pandemic-proof. It isn’t easy to imagine that robots will be painting a house or remodeling a bathroom anytime soon.
Also, are the franchises left on your list a luxury? Again, think specifically about the franchises on your list, not the industry. There will always be a demand for restaurants, but during a recession, the less expensive restaurants will fair much better than the expensive ones.
Many franchises today can fall under the category of trends or luxury purchases. Recessions and changing trends tend to force businesses unnecessary.
Does the service or product create the opportunity for repeat business?
Strong Business to Business or Business to Consumer relationships separate growing businesses from one-and-done. Repeat business doesn’t have to be monthly. If they are significant purchases, such as home improvements, they can be staggered over the years.
Surprisingly, even business-like moving services may not get much repeat business but can get referrals. It best to ask franchisees what percentage of their work is repeats or referrals.
Is the franchise’s brand well known, or will you have to spend time and money getting name recognition out to the community?
What is the competition in your area?
How would that affect your business if you have a fixed location storefront and a competitor opens next to you?
Which of the remaining franchises on your list is least affected by competition?
You may want to own an Italian restaurant that sells pizza, but is there a demand for it in your area? Can you visit your competition and see how busy they are?
Are the prices or quality of products or services similar to others? Are those companies established in your community?
Read reviews of your competitors and then compare the number of reviews in a different but similar area in another area. For example, you are comparing Indianapolis to Columbus, Ohio.
Also, compare the reviews of your competitors to the franchise you are considering.
What if there are no competitors? Perhaps it is a brand new idea? If it is trendy or a luxury purchase, I would be cautious. Trends fade, and luxury purchases are not usually as recession resistant.
Understanding the competition can be difficult because some of the analysis is subjective.
If possible, visit your competition and see if the franchise you are interested in has any distinct advantages.
Has there been any legal action taken between franchisees and franchisors? Searching for the best franchise does not mean a franchise has zero complaints. Instead, what are they? Is there a pattern or trend to these complaints? And do they lead to lawsuits?
Previous litigation suits can be found in Item 3 of the FDD.
Item 3 includes the following topics:
Ask the franchisor if you can speak to a variety of franchisees.
Freshman franchisees can give you an excellent idea about the training and support, which is very valuable.
Junior franchisees, in their 3rd year, can speak to the ongoing training and scalability of their franchise.
Senior franchisees can speak to any fatigue, burn-out, and success of the franchise.
On the franchise disclosure documents is a section, Item 19, where you can see gross sales figures and the number of new, existing, and existing franchises in the past few years.
I do not recommend asking a franchisor for past franchisees who failed. It is too difficult to decipher fact from fiction. If you want to know how to become successful in someone’s franchise, I’d recommend following the franchisor’s system and questioning their top producers.
What are customers saying about the franchise? A positive reputation is golden.
Bankruptcy is a word I don’t even like to type. However, in our quest to find the best franchise to own, we should look carefully at Item 4 and Item 21 of the FDD. This is where bankruptcy by the franchisor or its affiliates is. Have an accountant read and clarify content in your Items 4 and 21.
Out of the remaining franchises on your list, eliminate the one with the worst reputation.
By this time, you have probably eliminated your list of the best franchises for you to own to just a few.
The question you ask here can be answered when you interview the franchisees and in Item 11 of the FDD.
Training and support are two of the critical reason why someone would buy a franchise instead of starting their own independent business.
When you speak to the franchisees, ask if they have any previous experience in their current franchise.
How would you describe the training and support? Is their continued training that has had an impact on your sales?
Are you able to get questions answered promptly?
How is the infrastructure of the company? Are the systems antiquated?
Having a business run at peak performance is no accident. It will require a lot from the franchisor and more from the franchisee.
If one franchise has better training and support than the other, this is a significant factor and should get a substantial amount of weight in your decision to find the best franchise.
Training and support are critical factors in the success of a franchise.
Consider finding another franchise if a franchisor does not allow you to see some of the training material after you agree to sign a confidential agreement.
Continued training and support are critical for most industries when searching for the best franchise.
The reason why people buy franchises is to be in business for themselves but not buy themselves.
People buy franchises for a multitude of reasons, but franchises can all agree that more profitable is better than less.
Unfortunately, franchisors are often not legally allowed to make earning claims. It is a big no-no, and the franchisor can face all sorts of legal troubles.
Many franchisors probably want to scream from the rooftop what some of their franchisees are making but legal cannot say a word.
Fortunately, the franchisees can sing like a canary. You can ask them any question you like.
It would be best to talk to franchisees in different stages of development, i.e., first year, 2nd year, and mature franchisees with at least five years of experience.
The optimum net profit varies depending on gross sales. For example, if a typical mature franchise (Hotel) grosses 15 million a year, it would not be unusual to have a net profit of 10-15%. However, another mature franchise in a different industry, Pet Grooming, might only gross $300,000 but has a net profit of 40%.
Knowing if the franchise meets your scalability starts with the question, “What is your goal?”
What type of income do you need to earn?
If your goals and income needs are modest compared to someone who wants to grow an empire, your scalability requirements will be radically different.
There are two ways to scale a business: buying more store locations or territories. Companies that require customers to come to you are frequently more expensive to scale.
Each new site starts with the same steps. From site approval from the franchisor and county, necessary permits, purchasing all the equipment, contracting staffing, and managing, the amount of time and money to scale is daunting.
The home service industry is easier and less expensive to scale. You only need to pay an additional one-time fee to operate in a larger territory. Other minimal royalties may also be, but none of the expenses.
If you have answered yes to the following list below, the best franchise for you will likely be a business that can be operated from home or an inexpensive lease.
If your budget is over $250,000, the opportunity to purchase storefront operations is also an option.
There is no correlation between franchise fees and training and support. The higher the Franchise Fee has no bearing on the quality of training or continued support.
Franchise start-up costs vary and can include any of the following:
You will want to know how much you will be investing and how long before you break even. Knowing your initial investment will help determine the additional capital required to pay your household bills and operating expenses. It is not unusual for many franchises to not break even for 12 months or longer. According to the federal trade commission, some franchises never break even.
By definition, all franchises have ongoing fees, such as royalties, regional and national advertising, and possibly additional costs. Royalty rates vary between 4.6% and 12.5%, depending on the industry.
Find out what are the mandatory franchise advertising requirements. These can come in several different forms.
Brand Development fees are a percentage of the gross sales. Brand Development can be spent on:
In addition to Brand Development fees, you may be required to spend a certain amount of money on your own. Some franchisors deduct these expenditures from your brand development fee, while others do not.
In my experience, I have found that very few people take the time to compare the ongoing fees. Ongoing fees vary widely within the same industry, so please compare Item 7 in the FDD. The difference can mean $100,000’s of thousands of dollars over the franchise agreement term.
If understanding your initial costs and ongoing expenses is not carefully examined, you will likely miss finding the best franchise for you.
If each of the five franchises grossed $1,000,000, the difference from the least amount paid to the most paid to the franchisor was an additional $65,000.
Note: Franchise agreements typically last ten years. That will be an additional $650,000 paid to the franchisor if the franchisee is grossing $1,000,000 yearly!
In other words, that is $650,000 that is not in your pocket but the franchisors!
I also reviewed the 2020 FDDs of 7 large painting franchises and found significant differences in ongoing fees.
Why don’t we bother to compare ongoing fees? Because we buy on emotion and justify with logic. small
When searching for the best franchise to own, you want to ensure the territory is exclusive and large enough to meet your financial goals.
Two factors determine the proper size of a territory.
The demand and frequency of service or product will affect the size of the territory. For example, SpeedPro printing has a territory size of 7,000 businesses. McDonald’s franchises have no territorial rights. Two different industries and one with exclusivity and the other with none.
Sizes Can Vary Greatly In The Same Industry
Small territories can dampen scalability, especially if they are not in a good area.
Also, take a close look at the exclusivity of the territory in Item 12. Some franchises limited exclusivity. For example, you may have rights to all residential work in your territory but not commercial work.
If you are looking at storefront franchises, see how close units can be together.
If you are unsure how many territories you need, check with other franchisees also; if their additional territories, ask if you can have first right of refusal to buy.
There is a remarkable study that gives scientific evidence conducted by the Iowa Gambling Task study.
It explains that our subconscious mind can process information much faster than our conscious mind. Our subconscious mind observes and then creates physical emotions that various types of equipment record. The equipment detects changes far before the conscious mind does. The conscious mind comes to the same conclusion as the subconscious when it can use logic to justify the emotional aspect.
To get a free copy of the Klappenberger and Son Questionnaire for Franchise Candidates, complete the form below.
Check out the “Questions to Ask Franchisors” section to get the information that you need to know from the franchisors!
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