What Franchisees Need to Consider When Looking at a Franchise
Unit level economics describes a specific business model’s revenues and costs in relation to an individual unit. It’s critical that a prospective franchisee has realistic expectations when it comes to developing a license territory.
Unit level economics.
Unit level economics describes a specific business model’s revenues and costs in relation to an individual unit. It’s critical that a prospective franchisee has realistic expectations when it comes to developing a license territory. Franchisees should review the item 19 of the Franchise Disclosure Document (FDD). The franchisor cannot make earnings representations that are not included in item 19 of the FDD. Existing Franchisees are a great source of information and a list of existing franchisees. Item 20 of the FDD will be helpful in finding contact information of existing franchisees.
2. The cost of the total investment not just the cost of the license.
The FDD for a franchise opportunity will clearly list the range of cost to license and open a location. Item 5 will outline initial costs while Item 6 will include royalties and other fees. Ongoing operating capital, real estate, insurance, and funds for salaries are just a few additional details that will come up and many are covered in Item 7 of the FDD. The best way to gain a better understanding of these costs is to connect with members of the franchise development team or reach out to existing franchisees.
3. Territory demographics.
Territory demographics are imperative to consider when opening a franchise as the concept may not perform as well depending on the territory demographics. Demographics can vary ranging from something as simple as population to more complex criteria that take into consideration single family households, income ranges or business counts related to the concepts’ target customer. When looking at different territories, prospective franchisees must determine “Do the territory demographics align with the business?” A lawn care franchise in a downtown metro area might not be a good fit even if population would make the territory attractive on the surface. Similarly, an urban territory might be less than ideal for a commercial cleaning territory. What is key is not only knowing your target customer but understanding how key territories demographics align with the customers you will be targeting. In addition to considering territories and demographics, franchisees must consider additional factors that could further impact their decisions such as accessibility, the local economy, and more. Also consider if the territory is exclusive and if the franchisor has the ability to operate a company owned location in the territory.
4. Source of customers.
In entering a new territory, depending on the franchise’s reach, prospective customers may be unaware of the concept and why they should purchase from your new franchise. Franchisees need to consider how they will acquire customers. Will they invest in advertising? Sales? Marketing? Cold calling? While many franchisors offer support in this area, should they not, franchisees will need to think through and designate who will be in charge of these responsibilities.
5. Strength of the system.
Determining if a brand is established or a startup concept will help you determine the strength of its system. While established brands offer a concise system that has proven success, startups offer a system that may be working although not have the reach of a more established brand. In addition, researching a brand’s system will allow franchisees to understand additional crucial information including franchise turnover, if franchisees are able to sell their business when ready, and more. Item 20 of the FDD will list new franchises opened, terminated, transferred, and closed for the last 3 years and is a great place to start in understanding this. Also, in making calls to existing franchisees one should inquire about the strength and stability of the system from a franchisee perspective.
6. Support structure and background of the leadership team.
The majority of franchise systems will be prepared to help their franchisors succeed, though how each franchisor approaches that differs. It is important for franchisees to inquire how they will be supported in the process of opening their business. This can include anything from operational support to locating real estate. Additionally, the members of a franchisor’s leadership team are incredibly important. Many franchises seek individuals with a robust background in franchising offering knowledge and experience in the category and positioning franchisees for success. It is important for franchisees to inquire who is on the leadership team and how they will be beneficial to the franchisee’s business.
7. Read the franchise development deal (FDD) and franchise agreement.
A lot of meaningful information lies within the Franchise Disclosure Document (FDD) including the franchise agreement. These documents can detail key information including what kind of ongoing royalty do you have to pay and whether or not it can it change. They discuss if there are other required fees such as technology and advertising, conference attendance, and if you required to use certain materials, products, or equipment. In addition, they can explain what types of legal proceedings are disclosed by the franchisor. Perhaps most importantly, these documents discuss what the term of the agreement is, how to renew or extend theses terms, and what the process of selling or exiting the franchise system entails. While they may be lengthy, it is critical to read and understand the Franchise Disclosure Document and the franchise agreement contained within!
8. Call or visit existing franchisees.
Positive validation of the system is one of the best indicators you can get. Connecting with a handful of franchisees within the system and understanding their journeys is incredibly insightful. Whether the franchisee may have a similar lifestyle or not, their stories can shine a light on the leadership team, trainings, processes and more. Additionally, existing franchisees can shed light on their day-to-day operational experiences and the triumphs and challenges of running their own business in the category. Most importantly, I encourage that you ask them if they are satisfied and if they would do it again?
9. Don’t make a quick decision.
This might be the single biggest event that impacts your life financially. Franchising is a great business model but that does not mean all franchises are created equal. Taking the time to do your research and ensure that your franchisor aligns with your financial and personal goals is crucial. Finding the right brand, goes beyond financial opportunity and often encompasses culture and resources.
Authored by Gary Bauer, Brand President of JAN-PRO Cleaning & Disinfecting
From April 2020 to present, Gary has been the Brand President for JAN-PRO Franchising International, Inc. and JAN-PRO Enterprises, LLC. From October 2016 through March 2020, Gary served as Operations Manager of Orkin Pest Control. Gary served as CEO of BDRY Systems from September 2015 to May 2016.
From September 2000 to August 2015, Gary served in various senior executive roles for the AmeriSpec, Furniture Medic, ServiceMaster Clean and ServiceMaster Restore franchise brands, including serving as Chief Operations Officer of the ServiceMaster Franchise Group from March 2012 to August 2015.