How to research and evaluate a franchise
Making an informed decision for your future business
So, you’ve done the research, read through our series “Franchising unfiltered: Understanding the business behind the brew”, and you’re feeling confident that franchising could be the right move for you. The next step is to take a closer look at the specifics of any franchise opportunity you’re considering.
But how do you ensure you’re making the best choice for your future?
The answer lies in thorough research and a structured evaluation process. In this article, we’ll outline the essential steps to help you properly assess a franchise opportunity and ensure it aligns with your business goals, financial expectations, and personal aspirations.
Step 1: Understand the Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is one of the most important tools you’ll use when evaluating a franchise. It provides detailed information about the franchise, including its history, legal obligations, fees, and financial performance.
What to look for in the FDD
- Franchise fees and ongoing costs: This includes the initial franchise fee, royalty fees, marketing contributions, and any other costs involved in running the franchise.
- Financial performance: Some franchisors provide earnings claims or financial performance representations in the FDD. While not all franchisors provide this, when available, it can give you a realistic expectation of potential earnings.
- Legal matters: The FDD will outline any legal issues, including disputes or litigation involving the franchisor or its franchisees.
Step 2: Meet with existing franchisees
There’s no better way to get a true sense of a franchise than speaking with current franchisees. They’ll give you a first-hand account of their experiences, the challenges they’ve faced, and the support they’ve received from the franchisor.
Questions to ask current franchisees
- What kind of support do you get from the franchisor?
- Are the initial training and ongoing resources helpful?
- How long did it take for your franchise to break even or become profitable?
- What are the biggest challenges you’ve faced as a franchisee?
- Would you recommend this franchise to others?
Usually, franchisees are open and honest about their experiences. Use this valuable feedback to make an informed decision.
Step 3: Evaluate the financials and business model
Understanding the financial side of a franchise opportunity is essential. Make sure you have a clear picture of the total investment required, as well as an understanding of your potential returns.
Key financial considerations
- Initial investment: What does the upfront cost include? Consider all the expenses, from real estate to equipment to marketing.
- Ongoing costs: Beyond the franchise fee, there may be other recurring costs such as franchise fees, marketing fees, and supply purchases. Be sure to evaluate these to get a full picture of what running the franchise will cost.
- Expected return on investment (ROI): Have realistic expectations about how long it will take to recoup your investment and start generating profits. Your franchisor should be able to provide realistic financial projections based on current franchise performance.
It’s also wise to consult with a financial advisor or accountant to get an expert opinion on the investment.
Step 4: Assess the level of support and training
One of the main advantages of franchising is the support you receive from the franchisor. A strong support system can significantly increase your chances of success. Evaluate what kind of training and support you’ll receive, both before and after opening.
What to look for in support
- Comprehensive training program: Ensure that you’ll be fully trained on operations, menu knowledge, customer service, and all back-end systems.
- Ongoing support: Find out how the franchisor supports you after you’ve opened. Do they provide site visits, marketing support, and troubleshooting assistance?
- Operational systems: A successful franchise relies on proven systems. Ensure the franchise provides tools for managing inventory, scheduling, finances, and customer relationships.
Franchisors that provide ongoing support will help you navigate challenges and grow your business over time.
Step 5: Evaluate the franchise culture and relationship
The relationship you’ll have with your franchisor is crucial for long-term success. A collaborative and supportive franchisor can make the difference between success and failure.
Key factors to consider
- Franchise culture: Does the franchisor foster a positive, collaborative culture? Are they transparent, accessible, and willing to work closely with franchisees?
- Communication: How well does the franchisor communicate with its franchisees? Are there regular updates, franchisee meetings, and an open line of communication for feedback?
- Long-term partnership: Franchising is a long-term commitment. Make sure you’re confident that the franchisor is in it for the long haul, and that they are invested in your success.
Step 6: Understand the legal agreement
Before signing anything, carefully review the franchise agreement with the help of a legal professional. This document outlines the terms and conditions of your franchise relationship, including rights, obligations, and any restrictions.
Key considerations in the franchise agreement:
- Term length and renewal options: How long is the franchise agreement, and what are the terms for renewing it?
- Territorial rights: Does the agreement grant exclusive rights to a specific area, or are you competing with other franchisees for the same customers?
- Exit strategies: Understand the conditions under which you can sell or exit the franchise, and the process for doing so.
How The Daily Coffee Group helps you evaluate your opportunity
Evaluating a franchise is no small task, but with careful research and a structured approach, you can ensure that you make the right choice for your future.
At The Daily Coffee Group, we believe in transparency and open communication. We provide prospective franchisees with all the necessary information to make an informed decision, including our Franchise Disclosure Document, financial projections, and access to current franchisees for feedback.
Our goal is to set you up for success by making sure you have all the tools and knowledge you need before you commit.
Next in the series: Your journey to franchise success with The Daily Coffee Group
In our next and concluding article, we’ll be wrapping up the series “Franchising unfiltered: Understanding the business behind the brew”.
To learn more about how to join The Daily Coffee Group, visit www.thedailycoffeecafe.co.za
