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How to Determine if a Franchise Is Successful

Fanchise

Buying a franchise starts with self-knowledge. On the website of the International Franchise Association is a search function that lets people interested in going into business as franchise owners find ideal opportunities. Some 1,100 businesses are listed there. Where do you start? With your goals, advises Leslie Kuban, who has owned franchise businesses for 14 years and, as a consultant with FranNet of Atlanta, has helped more than 240 people acquire franchise businesses of all kinds.

A common reason a person chooses a franchise business is that he loves the product or service as a customer. But that’s not a wise way to go about buying a business.

“A great example is the ice cream business,” Kuban said. “I’ve gotten probably 200 calls over the last 12 years from people who want to own an ice cream franchise. They think it would be fun to own that type of business. ‘We take our kids there. It’s a wholesome environment, and there’s always a big line out the door.’” She tells such callers to consider whether there might be a big line out the door because the present owner doesn’t have the skills to effectively manage a teenage, high-turnover labor base.

But if a particular business fits your skill set, fits the lifestyle that you want to have, will make the money you want to make, and will give you the future exit strategy you are planning for, Kuban said, then it’s worth looking into further.

“Those are the factors that have more impact…much more than, ‘I love the product,’” Kuban said.

Do your research

The first step in learning about a franchise is to spend time with the parent company, the franchisor, to learn about the skills and personalities of its top franchise owners. Ask to see the most successful franchise owners’ backgrounds and skill sets, and find out what they are doing to market the business and manage employees effectively.

“Talk about the industry that they’re in,” Kuban said, “and learn how the franchise is positioned uniquely within that industry.”

The Federal Trade Commission regulates the franchising industry. A franchise disclosure document (FDD) is the prospectus of the opportunity. It contains a wealth of information about the franchise business and the franchise company. By law, the franchise company has to give an FDD to the prospect 14 days before a commitment can be made.

Study the document, have your lawyer review it, and if you are still interested, go out and talk to other franchise owners. Spend time with them and ask detailed questions.

“If you’re showing that you’re serious and have done your homework and are prepared, most franchise owners will be helpful in helping you understand what the financials look like,” Kuban said. “They’ll give you the good, the bad, and the ugly.”

What about financials?

That first meeting with the parent company might seem like the time to get copies of financials, but the FDD does not have to show revenue or earnings expectations. However, you can always ask to see financials if they’re not part of the formal disclosure, and you may or may not get enough detail from what they hand you. Other franchise owners will be your main source of that information, Kuban said.

“To fill in the blanks and get what were your first-year sales, your second-year sales, what were your margins and so on, that information typically comes from the franchise owners, so you want to talk to a minimum of six to eight owners to get a broad perspective,” Kuban said.

Is the franchise is successful? Well, Kuban maintains, that has to do with the goals of the owner more than the money that goes through the business. Does the reality of their results meet the goals and expectations they had going in?

“Everyone has their own definition of success,” Kuban said. “Some define it as, ‘I’m able to replace my income.’ For some, it’s, ‘I don’t have to travel anymore and I’m able to sleep in my own bed every night.’ For some, it’s, ‘I’m creating an opportunity that my children can take over one day.’ It’s a personal definition.”

So look first at your goals, then do a good job of researching the franchising business so you don’t have unexpected occurrences and expenses. And finally, choose a business that’s a good fit for your skills, is affordable, and gives you sufficient income.

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