There is no such thing as a one-size-fits-all franchise. Entrepreneurs considering franchising must consider their financial constraints and the franchiser’s support system during the evaluation phase. Below are some basic guidelines to help you evaluate a franchise opportunity.
Fees and Set-Up Costs for Franchise
Each franchisee charges an initial fee. This can cost anywhere from a few hundred to several hundred thousand dollars. Ideally, the franchise fee would be self-funded (though some franchisers offer financing options). In either case, we recommend starting with a minimum investment of $10,000.
When evaluating a business investment, it’s critical to determine whether the opportunity is financially viable. Calculating a franchise’s profitability is not an exact science, but a few factors to consider:
- View the number of units (franchise locations) opened in recent years.
- Consider the percentage of newly opened franchises that remain open after a year.
- Analyze the franchise disclosure document and determine the average unit sales.
Franchisee Support System
When choosing a franchiser, consider the support systems they’ve established to ensure the success of their new location.
For example, 7Eleven flies accepted franchisees to their Dallas support center for training. Additionally, they have a resource center that hosts seminars and events. While not all franchisees, particularly small ones, will have the same resources as 7Eleven, ensure they provide basic training.
Commitment to Time
Operating a franchise will require a multi-decade commitment, ideally longer — you cannot operate a store for a year and then leave. McDonald’s, for example, has a 20-year franchise term.
Ascertain that you are prepared to remain for an extended period without pursuing other time-consuming commitments (such as a different career). If you believe you will want to leave in less than ten years, choose a brand with easier-to-sell franchises.
The majority, if not all, franchisees seek to expand in a specific geographic area. It would be unprofitable, for example, to open a new location only a few miles from an existing one or in an area with little demand.
Ensure that your prospective franchisee is interested in opening a location in your area. If not, consider your willingness to relocate.
How well-known is the brand you intend to franchise? Has the brand experienced significant growth in the last year if the brand is smaller?
When you evaluate a franchise opportunity, answer whether or not a prospective brand’s franchise will be profitable to operate. Choosing a large, well-known brand is not always the best course of action, as up-front costs can be high.
A smaller franchiser may be a more specific entry point — as long as the business has been growing in revenue.