The President and CEO of the International Franchise Association (IFA), Matt Haller, recently published an article discussing the advice he gives when people ask him whether they should buy a franchise. As he correctly notes, while buying a franchise can be a profitable investment, “that doesn’t mean franchising is right for everyone, or that every brand is right for you.” In the article, Haller shares his top three tips for prospective franchisees. Here, national franchisee lawyer Jeffrey M. Goldstein shares some additional insights on each of these three important considerations.
Due Diligence is the Key to Making an Informed Buying Decision
As IFA President and CEO Matt Haller also correctly notes, when you are thinking about buying a franchise, “[y]our north star must be conducting due diligence in the presale process.” Thorough due diligence is essential, and we have covered the due diligence process extensively on our blog.
In his article, Haller identifies the following as three key focus areas for prospective franchisees during the due diligence process:
1. “Understand the Brand”
Haller’s first tip is to “understand the brand.” He recommends comparing multiple competing franchise opportunities to ensure that the opportunity you choose is, “the right fit for your values and interests.” He also recommends carefully reviewing the Franchise Disclosure Document (FDD) for each opportunity you are considering and having the FDD reviewed by a franchisee lawyer—as the FDD is, “an unwieldy and dense document not readily digestible to newcomers.”
These are all good insights. When you are thinking about buying a franchise, it is absolutely essential that you make an informed decision. This means not only ensuring that you have a clear and comprehensive understanding of the franchise opportunity you ultimately decide to pursue, but also ensuring that you know how your chosen franchisor stacks up against its competitors. Even if you are initially focused on one particular franchise concept, through your due diligence, you may find that one or more of its competitors offer a more viable franchise opportunity.
Along with reviewing franchisors’ FDDs, there are several additional steps you can take to “understand the brand.” These include speaking with each franchisor’s representatives, attending franchise shows, and attending discovery days once you have begun narrowing down your options. As discussed below, talking to current and former franchisees can provide invaluable insights as well. When you are evaluating franchise opportunities, there is no such thing as too much information. Your goal should be to gather as much information as possible—even if this means that the pre-buying phase takes longer than you were originally anticipating.
2. “Talk to Franchisees”
Haller’s second tip is as simple as it is important: “Talk to franchisees.” He shares the following insights, which we have covered in previous articles as well:
“It’s important to talk with franchisors, but remember: They’re incentivized to present their brand in the best light. A brand’s franchisees might speak differently. They’ll often give you unfiltered, real-world insights into factors like day-to-day operations, training, how long it took to become profitable, system changes implemented, and whether they would make the same decision again.”
For these reasons, he recommends that prospective franchisees “speak to as many franchisees as possible.”
Talking to current and former franchisees is among the most efficient and most effective ways to gather information about the realities of a particular franchise opportunity. You should be able to find current and former franchisees’ contact information in the franchisor’s FDD.
While current franchisees will often be willing to share a wealth of information, talking to former franchisees can be just as valuable—if not even more so. In many cases, former franchisees will have no qualms whatsoever about discussing their experiences, and this can provide you with the most unfiltered view of the franchise of all. When it comes to speaking with current and former franchisees, there is no “right” number of franchisees to contact—you should continue making calls until you are confident that you have sufficient insights to make an informed buying decision.
3. “Embrace the Risk”
Haller’s third tip is to “embrace the risk.” As he clarifies in his article, however, this does not mean accepting a level of risk with which you are uncomfortable. Rather, he advises, “it’s critical to understand the many factors that impact whether franchise brands continue to grow,” and prospective franchisees must realistically assess whether they are prepared to “handl[e] the ups and downs of small business ownership.”
Buying a franchise inherently involves risk. While buying into a recognized brand with established business systems can help increase your chances of success, all businesses can fail. As a franchisee, you will also have costs (i.e., royalty fees and advertising fund contributions) that you wouldn’t have as an independent business owner. Additionally, while being able to rely on the franchisor’s branding and systems can provide benefits, being required to abide by the franchisor’s brand rules and system standards can restrict your profit potential as well.
While franchisees must undoubtedly be willing to embrace the risks of franchise ownership, at the buying stage, a better approach is arguably to focus on evaluating the risks involved. You should only embrace reasonable risks that you are willing to accept based on your personal experience, financial resources, and risk tolerance (or aversiveness). To decide whether you are prepared to embrace risks, you first need to know what these risks are. Once you have fully evaluated a franchise opportunity, you can decide whether the risks are worth taking, and then you can decide whether you are prepared to move forward.
Request a Free Initial Consultation with National Franchisee Lawyer Jeffrey M. Goldstein
At Goldstein Law Firm, we offer several fixed-fee franchise business review programs for prospective franchisees, and every engagement starts with a free initial consultation. If you would like to discuss your franchise opportunity with national franchisee lawyer Jeffrey M. Goldstein in confidence, please call 202-293-3947 or tell us how we can get in touch online today.
