How to Perform a Comprehensive Franchise Analysis Before Purchasing

Are you considering buying a franchise but unsure how to analyze if it will be a wise investment? Performing thorough due diligence before purchasing a franchise is crucial. Making such a major business investment requires carefully evaluating all aspects of the franchise system.

This comprehensive guide will outline key factors to research when analyzing a franchise opportunity. It covers conducting financial analysis, interviewing current franchisees, assessing offered training and support, researching target markets and growth potential, understanding the legal agreements and required commitments, and more.

Follow these in-depth franchise analysis tips before signing any franchise agreements or handing over your hard-earned money.

Step 1: Start with Self-Analysis

Before even looking at franchises, first analyze if owning a franchise aligns with your goals, skills, and lifestyle. Some key considerations:

Assess Your Financial Situation

How much money do you have readily available to invest in a franchise?
Will you need financing and are you eligible for franchise loans or other options?
Make sure you have a budget in mind for the franchise fee, setup costs, equipment, etc.

Align with Your Goals

Why do you want to own a franchise business? Be clear on your motives and what success represents.
Are you looking primarily for greater income or a more flexible lifestyle for example?

Evaluate Your Skills/Interests

What skills from your career or education could assist with owning a particular franchise type?
What business fields or products/services interest you personally?

Matching a franchise opportunity well with your financial abilities, ambitions, and competencies increases the odds for achieving individual success.

Step 2: Start Franchise Research

With a better understanding of your personal situation and franchise ownership goals, begin researching the options that appeal to you.

Request Franchise Disclosure Documents (FDD)

An FDD contains key details on the franchise system to inform your analysis. This legally required document covers:

Background on the franchisor management team
Costs involved like the franchise fee, setup expenses, ongoing royalties, etc.
Franchisee responsibilities for operations, training, services provided
Revenue generation and unit economics
Summary of current franchise locations
Past and pending litigation
Contract termination, transfer/renewal terms

Carefully reading the FDD is essential for narrowing down appealing franchises worth further investigation.

Search Public Records and Complaints

Check for any complaints submitted to the FTC or state records against the franchise under consideration. Search the franchisor name online along with keywords like “scam” or “complaint” to uncover any red flags.

Look for a reasonable number of disputes compared to system size and how the franchisor addressed issues. No franchises exist completely without complaints but it offers insight into how they manage problems.

Verify Item 19 Financial Claims

Item 19 in the FDD provides the average revenues, costs, and profitability that current franchise locations generate. Have a professional like an accountant verify if the franchisor assumptions seem reasonable against typical unit performance.

It reveals what you might expect regarding earning potential from owning the franchise. But apply conservatively as individual franchisee results can still vary significantly.

Step 3: Interview Current Franchisees

Speaking directly with franchisees gives invaluable insight into the experience of owning and operating this business day-to-day.

Request Contact Information

The FDD should provide a list of current franchisees that publicly consented to connect with potential buyers. If not readily included, request contacts for franchisees with locations similar to your prospective territory.

Prepare Informed Questions

Before calling, outline intelligent questions that go beyond superficial franchise marketing propaganda. For example:

How satisfied are you overall with the franchise opportunity?
How receptive has franchise leadership been addressing issues you faced?
Have the financials met or exceeded Item 19 projections for your franchise?
If you could do it over again, would you still invest in this franchise or consider other options?
What ongoing challenges have you experienced as a franchise owner in this system?

Identify Red and Green Flags

Pay close attention to the franchisees' tone and specific examples as you evaluate responses. Some key things that raise red flags to watch include:

Struggling financially for multiple years
Lawsuits against the franchisor related to failure to support
Failure to deliver on promises like exclusivity rights
Paying royalties without receiving ongoing value
Poor operations guidance once the location is running

Some green flags to hope for are satisfied franchisees that:

Are achieving strong financial results
Have a collaborative relationship with the support staff
Required minimal additional capital beyond the startup budget
Faced challenges but felt corporate provided solutions

Use feedback from current franchisees heavily in your buy decision process. Their real-world perspective often reveals the most about viability as a franchise opportunity.

Step 4: Research Existing Locations

In addition to gathering impressions from franchisee interviews, consider anonymously contacting and evaluating current franchise locations as a potential customer.

This allows you to judge factors like:

Customer service competency
Perceived value for cost of products/services
Professionalism of facilities and operations
How locations compare if assessing a competitor
General responsiveness to inquiries as a buyer

Observing these in-person dynamics offers an additional layer of unique due diligence. It also avoids only relying on potentially biased input from the franchisor or vocal franchise owners motivated to recruit you.

Step 5: Assess Offered Training and Support

For those new to business ownership, the training, tools, and ongoing assistance franchise systems provide is often a primary selling point that attracts investment by hopeful entrepreneurs.

When evaluating franchises, you want to determine if the promised support will set you up for success managing a business or simply sound good for marketing purposes.

Research Specifics of the Initial Training

What specific topics, operational processes, and activities are covered in onboarding new franchisees? The more detailed the description the better.
What is the experience level of those facilitating the training? Seasoned subject matter experts are ideal.
How long is the initial required training? Multi-week programs tend to be most thorough.
Is ongoing training offered or required as the business evolves?

Evaluate Tools and Research Provided

Are templates, software, operations manuals etc included that simplify running the franchise? Request samples.
Is site selection and ongoing market research assistance offered? Thorough support here is invaluable.
Does the franchisor provide guidance selecting suppliers or negotiating pricing?

Weigh the Ongoing Support Model

Who assists franchisees when issues inevitably arise? What are their competencies and is there local support where relevant?
Does the franchisor take a collaborative “partnership” position aiming to help you succeed?
What percentage of your ongoing royalties appears to be reinvested improving the system?

Vetting both the franchisor corporate team and field consultants that support franchisees gives confidence these experienced individuals have your success front of mind.

Step 6: Assess Target Markets and Growth Potential

In addition to evaluating the franchise organization itself, also devote due diligence determining if appealing markets exist to realistically support locations in your preferred territories.

If targeting an existing market, is it oversaturated or still offer ample growth opportunities? Drive locations at varying days/times to judge foot traffic.
Have market demographics, consumer preferences, and competitive forces changed since most recent site selection research was conducted?
If the franchise is newer, is relevant industry data available indicating demand should develop as projected?

Work with a franchise broker or business appraiser to generate independent assessments on unit projections if desired.

Growing territories are ideal but some stagnant markets might support additions if competitors failed to adapt to shifts in consumer behavior the opportunity provides.

Step 7: Review All Contracts Carefully

Any legally binding franchise agreements deserve careful examination with a lawyer before signing documents or providing deposits.

While paperwork varies across systems, be especially attentive to fine print clauses addressing:

Length of initial/renewal contract terms
Requirements for opening additional units
Conditions where your territory exclusivity applies
Transparency on how marketing fund budgets are allocated
Ability to sell the business if desired in the future
Grounds for terminating your franchisee rights
Non-compete limitations if you exit

Look for unreasonable restrictions or policies that demonstrate a lack of good faith. Also confirm you qualify and understand any financing terms if applicable.

Step 8: Final Evaluation Taking Everything Into Account

With the financial figures, system operations, leadership, and market demand analyzed thoroughly, here are final factors to judge:

Considering the franchise fee, setup costs, and ongoing royalties, does the profit potential rationalize the required investment based on your current needs and lifestyle expectations?
Do the franchisor's core values, leadership integrity, and openness to feedback encourage trust in their competency supporting your success long term?
Does the corporate team convincingly exhibit a commitment to innovation improving their systems as markets evolve?

If concerns raised during due diligence still linger, revisit competing franchise systems also under consideration that rated more favorably.

Proceed Knowing the Commitment Involved

If ultimately moving forward with the new business purchase, embrace the rewarding but turbulent journey ahead with balanced expectations. Understand challenges will still arise requiring grit and further investment at times despite the most careful analysis before buying a franchise. But with sufficient passion, preparation, and perseverance, your franchise ownership journey can prove fruitful.

For further questions or guidance on buying an existing franchise, contact us to speak with a franchise specialist.

Franchise Creator