Determining the strength, character and potential of long-term success of a franchisor can be difficult for prospective franchisees who are searching for the right franchise. I’ve been in and around franchising for most of my career. During that time, I’ve been very fortunate to learn a lot about the “industry” of franchising. Passing along helpful information and experiences to others who are considering franchising is a passion of mine. It’s with that in mind that I offer you these suggestions to evaluate potential franchisors from an insider’s point of view.
1. Buy In: Identify the number of existing franchisees who have expanded within the system.
A strong indicator of a franchisor’s strength is the number of existing franchisees who have expanded by opening additional territories that weren’t part of their original agreement. In other words, these are people who signed on for one or more units initially, fulfilled that contractual obligation by opening those businesses, and then came back to do it all over again. The reasoning behind this fact is simple – existing franchisees have a more comprehensive view of the franchise opportunity than anyone else. They’ve invested their money and have had full access to everything the brand has to offer in terms of support, training, etc. They’ve also experienced the business, its customers and its employees firsthand. If things weren’t going well, they probably wouldn’t have done it again.
2. Consider the number of franchisees who act as brand ambassadors.
A good franchise system should have a significant portion of franchisees who serve as unofficial brand ambassadors. There are two key places to find this information. First, ask the company how many franchisees are on their roster as a direct result of being referred by a current franchisee, vendor or other person who has relevant knowledge about the brand. People don’t recommend bad businesses to their friends, family and former business associates. The second place to look for ambassadors is through the validation process. With most franchise systems, there are current franchisees who you can call to “validate” that the business model does indeed work. You’ll want to ask if the franchisor is effective in fulfilling its commitments to franchisees and customers and if it is successful in leading the company in general. By the way, when validating the business model, don’t make the mistake of only listening to prerecorded conference calls hosted by the franchise’s happiest and most profitable franchisees. It’s okay to listen in and even participate in those group calls, but be sure to call a few franchisees at random, as well.
3. There is a story within the financial statements of the franchisor. Make sure you understand it.
Within every Franchise Disclosure Document (FDD), franchisors are required to include the previous three years of financial statements. Within the financial statements, there is a story. Even if you do not consider yourself a financial guru, you need to read these documents and consider having your accountant review them, as well. Not only will these documents help paint a picture of the franchisor, they will also provide you with a framework for validating the claims the brand makes about its franchisees’ financial performance.
To learn more about how to interpret and review franchisor FDDs, please visit our recent blog post: https://rightathomefranchise.com/blog/3-tips-for-reviewing-a-franchisors-financial-statements/
4. Take into account the franchisor’s research and validation process.
When you initially express interest in a franchisor’s opportunity, there are clear indicators of the company’s qualities that you can ascertain from the onset of the relationship. Begin by thinking about how long it took the franchisor to respond to your inquiry. Was it immediate or did it take several days? If they do not respond to you in a timely manner before you give them your money, how responsive will they be after you sign?
As you dig deeper and continue speaking to individuals in a company’s franchise development department, think about the discussions you have as the process continues. Are they open and honest conversations? Does the brand have an “ask us anything” mentality or are they guarded and dismissive? Do they directly address the questions you ask or do you often feel you are getting the “sales” answer to your question? Also, think about the questions the franchisor asks you. Are they interested in your background story and you in general? Are they screening you as a candidate? A franchisor that is selective and genuinely understands what your goals and motivations are is probably more focused on the long-term success of the company than they are with selling new franchises.
5. Find out what the franchisor’s infrastructure looks like.
It is valuable to compare the number of support staff with the number of franchisees in a franchise system. Although there is no golden ratio across all industries, understanding how many people’s day-to-day roles involve working directly with franchisees is important in determining what your long-term relationship could look like with the franchisor. You want to make sure you have the support you need as a franchisee.
At Right at Home, for example, we have over 80 people in the corporate office supporting close to 500 locations. We believe that’s an excellent ratio of support staff to franchisees for our business. Just like in education, smaller ratios of students to teachers are typically better. Most of our 80 people spend their full time and energy doing something related to helping our franchisees. In addition to the usual departments of vendor relations, marketing, etc., our franchisee support department is comprised of regional managers, RightStart managers, financial support specialists and other operational support specialists who literally spend every second of their workday helping franchisees, either in person or on the phone. We know some will say that we are over-staffed. That’s okay, because our franchisees will tell you they are happy with the level of support they receive – and because, at the end of the day, we’re all on a mission to improve the quality of life for those we serve.
Hopefully you have found these five pointers helpful in your research. My hope is that these will help put you on the path to asking the right questions to the franchisors that you are considering. As a reminder, there are no end-all, be-all answers in any of the pointers above. Researching a franchise is about creating a body of work that educates you and provides a great baseline for your decision. Lastly, remember that the best way to have a good experience is to go into each opportunity with positive thoughts and enthusiasm, tempered by very accurate expectations.