Aug 29, 2017 - Blog by |

What makes a good franchisor? It is a simple question, but most people have different answers. Do you value strong operational support? Or, do you prefer to operate under an established brand but to otherwise be left alone? Do you want your franchisor’s executives to be franchise-industry veterans? Or, are you looking for an innovative opportunity that has gained traction by breaking the mold (within the confines of the highly-regulated franchise industry)?

If you are considering a first-time franchise opportunity, it is understandable that you are looking for guidance on the factors to consider when evaluating prospective franchisors. Here are some tips that may help you in making an informed decision:

5 Tips for Evaluating Prospective Franchisors

1. Assess the Owners’ and Executives’ Experience

When you are relying on a franchisor for success, the people behind the company matter. Some franchisors are owned and run by individuals who were successful in building a brand and business model, but who lack any prior knowledge or experience in franchising. Then, there are the franchisors that hire industry veterans who have previously built and sold large franchise systems. One option is not necessarily better than the other, and you need to decide what you value most in the leadership of your franchise organization.

You can find information about the franchisor’s owners, executives, directors and managers in Item 2 of the Franchise Disclosure Document (FDD).

2. Consider the Number of Years the Franchisor Has Been Franchising

The age of the franchise system may be another factor worth considering as well. Generally speaking, well-established systems can offer a greater likelihood of stability, while you may be taking more risk as one of the first franchisees to sign a franchise agreement with a new franchisor. But, once again, there are exceptions on both sides, and you will need to conduct thorough due diligence to decide if you are comfortable with a particular franchise opportunity.

3. Review the Franchisors’ Financial Statements

Franchisors are required to disclose their most-recent financial statements in Item 21 of the FDD, and a careful review of the franchisor’s financials can often tell you a lot about the viability of a potential franchise opportunity. Does the franchisor make more in initial franchise fees than it makes in royalties? Has its financial condition improved (or at least remained steady) over the past three years? These are just two of several questions you will want to consider.

4. Examine the Growth (and Other Changes) of the Franchise System

The franchisor’s growth numbers in Item 20 of the FDD can also provide a lot of valuable insight. Has the system grown steadily or exponentially? Is the franchisor meeting its projections for new openings? Prospective franchisees should review the franchisor’s renewal, transfer and termination data as well.

5. Seek Input from Current and Former Franchisees

Finally, one of the best ways to learn about a franchisor is to speak with current and former franchisees. Talk to several – and not just those recommended by the franchisor – and do not be afraid to ask the questions you want answered.

Goldstein Law Firm | 30 Years’ Experience Representing Prospective Franchisees

Franchise lawyer Jeffrey M. Goldstein brings more than 30 years’ experience to representing current and prospective franchisees in franchise agreement negotiations and litigation. If you are considering a franchise opportunity, you can call (202) 293-3947 or contact us online for a free initial consultation.

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