Evaluating a franchise opportunity today can be a difficult task.
With all of the different rankings, ads, and other franchise claims, identifying the right opportunity requires careful study of the FDD as well as talking with current franchisees.
Some words of advice to those looking to find their passion and work for themselves in Franchising:
When you get to the point in your due diligence where you see the Franchise Disclosure Document (FDD), certainly evaluate the costs associated with the franchise as well as the roles and responsibilities of both the franchisee and franchisor. This is valuable when you talk to franchisees during your validation to make sure that the roles stated are actually experienced by existing franchisees.
Most will have what is called an Item 19 (Financial Performance Representation) and it is really important that you understand the unit economics of the system you are evaluating, as this will again aid you in your discussions with existing franchisees.
One area that is frequently overlooked is Item 20 in the FDD (Outlets and Franchisee Information).
This is a critical area to review, as it will provide insight as to how many stores were transferred, closed, and not renewed.
For example, at Sport Clips we are very proud of the fact that with over 1150 stores open, we have had only three closures in the past three years.
This provides insight as to how the brand you are evaluating supports its franchisees; how discerning the brand is in its selection of franchisees and real estate; and the overall viability of the model. Are a lot of units closing due to low sales? Is the Franchisor terminating an inordinate number of locations?
Is the Franchisor not renewing franchisees? Item 20 can be one of the most important considerations when evaluating a franchise and probably one of the most overlooked by those looking for their "fit."
This type of research should help guide you in the questions you ask existing franchisees in your due diligence.
One result you are very likely to gain by paying attention to Item 20 in the FDD, and factoring this into your due diligence, is a clear idea of what the values of the Franchisor truly are...not just what the plaque says on the wall, but the values the franchisor lives by in its service to its franchisees.
It's becoming more important for a franchisor to include an Item 19 Financial Performance Representation - FPR just to be competitive with other franchise offerings.
For first time franchise buyers it's wise to reject what you can't confirm.
So if the franchise concept you're considering doesn't have an Item 19 then you really have to ask yourself can you accept the extra risk?