Evaluating a Franchise Opportunity

Written by Daniel Cargille Saturday, 16 April 2011 07:20

When you decide to open a business and invest in a franchise, it's a big decision that's going to have you tied in for the long-term. The business plan behind a franchise company is designed to attract you, luring you in as they sell you on the overall virtues of a company. Their tactic is to paint a picture that highlights high profits and long-term success. It's important to remember though that just because something is attractive on paper doesn't mean it's the right deal for you and things will go peachy with your investment. With the economy you never know the investment will bring in enough income to pay you as well as the franchisor.

When you decide to open a business and invest in a franchise, it's a big decision that's going to have you tied in for the long-term. The business plan behind a franchise company is designed to attract you, luring you in as they sell you on the overall virtues of a company. Their tactic is to paint a picture that highlights high profits and long-term success. It's important to remember though that just because something is attractive on paper doesn't mean it's the right deal for you and things will go peachy with your investment. With the economy you never know the investment will bring in enough income to pay you as well as the franchisor.

Because of the possibility of a bad investment in any business deal, you need to decide carefully if a specific franchise opportunity and franchisor are right for you. Here are three guidelines that can help you decide if you're making the right decision and will present you with guidelines to consider as your evaluate your opportunities.

Franchise Evaluation Guidelines 1 - Hidden Costs

One of the most common mistakes made by people when they evaluate a franchise opportunity is that they don't consider all the costs that are associated with opening a business or investing in that franchise. On top of the typical franchise fees and recommended start up costs by the franchisor you may need to also pay additional rental or lease costs, construction or remodeling costs, equipment outfitting, inventory purchases, licenses, insurance and more. You may even be required to pay additional fees for initial marketing and promotion.

Part of that financial miscalculation is also not properly projecting the costs of operation verse projected income for the first year. This startup lag can eat away at profits and investment dollars while the new franchise slowly gains a foothold in the community. Good planning for any new business, franchise or not, is to have enough investment capital to run expenses for a year without profiting.

Franchise Evaluation Guidelines 2 - Handling Marketing

Find out who will handle the marketing for the franchise - you or the franchisor? Will it be split? In some cases a brand can carry itself based on recognition and brand power but you can't rely on this alone to carry your business. Part of your evaluation is finding out how much you have to invest in getting your brand known, launching in the local marketing and how much the company will invest in improving visibility for your franchise.

Including in the marketing analysis should be detailed study of the local competition as well as other franchises and businesses in the area that offer a similar service. Likewise, find out what other stores from your franchise are in the area as this could water down the value of the customer base and cut into profits worse than a common competitor. Know your market before you settle on a franchise opportunity.

Franchise Evaluation Guidelines 3 - Finances

When you're buying into a franchise you're making an investment that you hope will pay off one you start putting real work into growing it. To ensure that you do make a good investment you want to study the financial information of the franchisor. Look over their financial disclosure documents and get a legal consult to help with this if you're unsure of how to read the information. Pay special attention to growth and where the money comes from for the franchisor. Growth from royalties means the customer base is growing. Growth from selling franchises may not indicate true market success.