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Insights from a Franchisee – Things to Consider Before Investing   

Like many Franchisees, I purchased my first business franchise with the broad objectives of making a good living, building equity in my future, and eventually having a flexible schedule.  

It was a great franchise...just not the right one for me. If I had made my objectives more specific and been a bit more thorough with my due diligence, I would have purchased a different franchise business more suited to both my lifestyle objectives and my longer term financial objectives. As it turned out, after four stressful years of running a franchise business that was not satisfying my family's lifestyle expectations, I was able to sell the franchise with a good profit and with a wealth of experience for my labors.  

There is nothing like the school of hard knocks to instill knowledge…unless you can avoid the same mistakes by learning from others. My first experience as a franchise owner taught me several lessons that, as a Franchise Consultant and President of FranUnite, I will do everything in my power to help our clients learn without having to first make costly mistakes. Here are a few of the potential pitfalls that come to mind and areas that you must explore and understand in great detail.  

1.  What are the hours of business operation?

Be aware that the hours of a franchise business may be dictated by the Franchisor. Depending on the type of business, it may be anywhere from totally flexible (like the Consulting Service business) to 24/7 (like some support businesses). 

2.  What are the seasonal characteristic of the business?

Most businesses are seasonal to one degree or another. For example the holiday season may be feast for some franchise businesses and famine for others. It is important for you to understand how seasonal factors impact your staffing, your cash flow, your personal time demands, etc. 

3.  What is the required ownership model?

Franchises offer three types of ownership:

• Non-Passive - The franchise owner is also the business operator and has 100% involvement in operations.
• Semi-Passive - The franchise owner can rely on his / her employees to perform some of the management / operation functions.
• Passive - The franchise owner can have employees that will successfully manage and operate the business with minimal involvement from the owner.

Regardless of which model is required by the Franchisor, expect that extreme demands will be placed on your time and resources during the startup phase.  Beyond that, it is critical that you choose the type of franchise ownership that meets your objectives, and that the type of ownership you require can be profitable.  Although attractive conceptually, passive franchise ownership may not be financially feasible because it creates too much overhead.    

4.  What kind of staffing will be required, what is the typical profile of that staffing, and are you ready to manage that profile?

There is a big difference between managing part-time teenagers, blue collar workers, technical whizzes, and white collar office staff.

I had been accustomed to managing technical teams that were intent on building and maintaining exceptional software. The team that I managed with my first franchise was made up of skilled laborers. Although they were great guys and good at their trade, their work ethic was different, and required a different degree of management. 

5.  What is the normal sales cycle (the time to consummate a sale)?

In many cases, (retail sales, for example), the sale is almost instantaneous.  Typically these are lower value transactions, the business model assumes a fairly high transaction volume, and the business operates with virtually no business backlog.

On the other hand, larger ticket items like real estate or franchise sales may take months to close with relatively few transactions necessary to make a decent income.

Your business plan must take the sales cycle into account, recognizing that your startup time and associated costs, as well as your ongoing operation, are strongly influenced by the sales cycle. 

6.  What is the average transaction value, how many sales do you have to make a month to satisfy your financial goals, and how will you generate the leads that you need to generate that level of revenue?

Lead generation is the lifeline of any business.  It is critical that your plan is based upon a sound foundation of the volume of leads necessary, where they will come from, and the cost of generating them.  

If you don’t have some experience in sales, you may be frustrated with the quantity of leads that you need to find a good prospect, and the number of qualified prospects that you need to close a sale. 

7.  How many territories do you need to own in order to achieve your long term financial goals, and can you reach that objective with this franchise?

Existing franchise owners can help to validate income potential per territory during the validation calls/visits. Another good source for verifying revenue is Chapter 19 Earning Claims listed in the Franchise Disclosure Document.

Franchisors are not required to disclose this information, but many do. If the Franchisor does not include earning claims in his FDD it does not mean that the business is not successful or profitable. There are several valid reasons why they may not include that information. 

If the franchise business income potential is sufficient to meet your requirements, determine if you can have first right of refusal to the adjoining territories that you need.  At the same time, from a life style perspective, you must ask yourself if you are up to managing the number of territories that you need to meet your financial objectives.

This is not an exhaustive list of the important issues that you must investigate, but some of the most important. FranUnite is here to guide you each step of the way as you evaluate your franchise opportunities and develop your franchise business plan.

Bob Wood is President and Franchise Consultant at FranUnite.