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MarkLeonard's picture

Buying a Franchise? Research the Franchisor.

Tue, 06/03/2008 - 13:00 — MarkLeonard

When considering committing time and money into a franchise, it is important to consider the business dynamics at the franchisor level. Here are some questions to research before committing to a franchise:

  • How many stores does the franchisor have in its network? How many are franchisee-owned and how many are company-owned?
  • How many new franchisee-owned stores have opened up in each of the last 5 years?
  • How many new franchisor-owned stores have opened up in each of the last 5 years?
  • How many franchisees have sold their stores, or shut down, in each of the last 5 years?
  • What has been the AUV (average unit volume) for each of the last 5 years? Even better, knock off the results of the top 5-10% of stores. All franchises have super-star stores that do great volume. You’re probably not going to get one of these. Therefore, by knocking off the cream, you can get a more realistic expectation of your results.
  • What has been the trend in the average ticket for each of the last 5 years?
  • List the 5 closest competitors to your potential franchise. Compare your franchisor’s growth rate to the growth rate of the competitors.
  • Get the franchisor to articulate their growth plans both nationally and in your area.
  • Given the national and local trend knowledge you now have, is the franchisor’s growth rate expectation realistic, in your opinion?
  • What significant developments have affected the franchisor in the last 3 years, such as executive personnel changes, major financing events, litigation, major change in operations, major change in marketing? Have any major changes been announced but not yet implemented?
  • Is the franchise owned by a large corporation or private equity firm that has plans to “flip” the organization, and if so, can you project how that might impact your results.

These are questions that you do NOT have to research if you are buying an existing independent business, but since the franchisor controls so much of the destiny of the franchisee, it is critical to research this information prior to investing in a franchise.