Tips to researching a franchise from an expert
- Wednesday, March 2, 2011
When researching a franchise opportunity, it is no big secret that prospective buyers should seek out as many resources and opinions as possible. While books, websites and franchisor materials are necessary reads, sometimes the most valuable information can come from other experienced owners.
With nothing to lose or gain from an interested buyer entering the franchise world, current or former franchise owners are the most qualified to offer individuals their honest opinions. In a recent article for the Web site FranchiseKnowHow, Ed Teixeira volunteers his considerable experience in franchising to help prospective franchisees conduct a thorough evaluation.
Teixeira advises potential franchisees to do three things before taking his advice into consideration: identify a personally and financially appropriate franchise system; obtain a copy of the Franchise Disclosure Document and verify that it is properly registered in the individual's state; and seek out a third party for an additional perspective.
Keeping these items in mind, Teixeira then recommends that franchisees gather all possible facts, information and tidbits about a franchise that they can. He suggests using data from the Census Bureau and Commerce Department and contacting local business groups, such as the area's Chamber of Commerce.
Additionally, prospective franchisees should not forget to use their franchisor as a resource. "The type of response and quality of the information I receive from the franchisor can be a deciding factor in my decision to purchase the franchise," Teixeira adds.
It is also important to have another pair of eyes review the provided information, especially financial figures. Prospective franchisees should make sure to test the math regarding the franchisee gross margin and the relationship to royalties, he explains. For example, franchisees will want to make sure that they do not end up paying an 8 percent royalty if the gross margin is only in the 20 percent range.
An accountant can be exceedingly helpful when evaluating these numbers. Prospective franchisees should instruct their accountants to pay particularly close attention to the source of revenue for franchisees and any positive or negative trends.
"My interest will be to identify the source and level of capital that the franchisor has. Financial stability is important in terms of the franchisor being able to service and support its franchisees," explains Teixeira.
In addition to these points, franchisees should always make sure they perform a comprehensive due diligence before signing on the dotted line. This includes evaluating such factors as operational simplicity, return on investment, business credibility and a system's ability to adapt to and meet demand.
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