The following post is by Peter Schwarzer, director of research at FRANdata.
Prospective franchisees have lots of questions. “How do I purchase a unit? Can I buy more than one? What would my territory be? How much does it cost? What are the royalty payments? How much training will you give me?” and the all-important one: “How much can I make?”
Before making a sizeable investment of capital and commitment of time, a prospective franchisee must get answers to these questions and many more. In the rankings we created for FORBES, we looked at many performance metrics including things like: is there demand for business? Are most units successful over time? Does the franchise system offer support to its franchisees in areas like financing, marketing, and operations? We examined a ton of information on each brand.
In the end we realized there was one major criteria that affected all of the others: whether the franchisor shared the information necessary to assess its performance. While the FORBES articles highlight 30 great brands, there are 100s of others that are also excellent opportunities. We looked at all of them but there were some that we simply had to exclude because they do not provide the information necessary to evaluate them. This does not necessarily mean that they are bad franchises, but without anything to prove it, there is no way that we could call them good.
A franchisor must be willing to share some basic performance metrics about itself. In order to recruit the best possible franchisees, they need to answer those questions mentioned. For instance, one criteria we examined about every franchise brand was whether it included a financial performance representation in their franchise disclosure documents (FDD). This part of the document is optional; about 60% of brands give this information, the others do not.
This information is risky for a franchisor to provide – it can easily be the basis for lawsuits – but it helps to address that most basic of all questions: ”how much can I make?” The franchisor has to find a way to provide some information in this area. Not only is it a pretty important part of the franchisee’s business plan, but just as much it helps to set expectations so that the franchisee doesn’t go in with false hopes.
Information transparency is not only to help provide you, prospective franchisee, with answers. When you go to get a loan to open a business, your lender is going to ask all those questions and many more before they make you a loan. Your franchisor needs to help you through this process by providing the lender the underwriting information they need, as well as using any tools that assist with the process. We call this being a “lender friendly” franchise.
This is a two-way street too. Over the course of your running your store, you need to provide the franchisor with performance information. When you invest in a franchise, you are joining a system; you have a responsibility to improving the brand overall and supporting your other franchisees so that you all succeed together. To do that, you need to provide information about what’s working and what’s not.
So if I am a prospective franchisee, what is the single most important thing to ask yourself when considering investing in a franchise? It is this: do I have the information I need to make smart investment?
For more on the best and worst franchises, click here.
