Investing in a franchise is becoming an increasingly popular way to generate income as well as essentially becoming your own boss. But before you invest, you want to make sure you are hedging your bets the best you can by going with one of many possibly successful franchises. This ensures you have the best possible return on your initial investment.
But going through a franchise list can be daunting when a large portion of them look like incredible opportunities. It can be pretty straightforward getting rid of the obvious scams and bad ideas, but how do you determine from that point, what the best franchises to invest in are? There are countless ways you can give investors a fighting chance, here are five of the best.
1. Industry Growth
This is arguably one of the most important things to investigate and research before you really get started. You want to target an industry that has not only avoided shrinkage but is showing active steady growth. Use the information that prospective franchisors provide, but also research on your own and incorporate that into your decision.
Be aware of bubbles and trends with unsustainable growth. This is also seen as a “too good to be true” or “can’t lose” type of pitch. If you are looking at a franchise with explosive growth recently, extrapolate that out 5 or 10 years, and ask if that would be an oversaturated market. If you answer yes, then the franchise may be successful in the short-term but may represent a market bubble that could eventually burst.
Look for industries that show consistent growth, and which are more resistant to economic or market trends. A great example of this is many of the top franchises in the fast convenient dining industry during the recent global pandemic. Many were deemed essential, so they were able to continue to operate in some capacity, which allowed them to weather the worst of the shutdowns relatively comfortably.
2. Franchisor Support
Your potential franchisor should have a reputation for giving their franchisees, new and experienced, top-tier support. The franchisor should be able to show you a plan and a framework for how they will help support you in your investment. While owner-operators are expected to put in the hard work needed to make their investment successful, they are not expected to do it all alone.
Corporate support should have operations and procedures to not only train and educate you on running a business, but also how to hire, train, and guide employees. They should have consistency in their marketing campaigns, guidelines, and customer engagement structures so that the brand holds consistency with its market. This should extend to honesty in any communication or issue that you have. If you ask some tough questions, do you find that you get answers, or do you get the runaround? If you can’t get solid answers before you invest, why even cut the check?
3. Good Corporate Management
The last company that you should invest in a franchise for, is one that you aren’t personally confident in. Learn about the people who run the company, their experience, and their vision. Arrange a meeting with the management team, or the franchisee support team, or both. Speaking with them personally can help you make a much more effective evaluation of if you will be a good fit for the company.
Another helpful tactic is to get feedback from those who have been in your shoes before. Meet several of the franchisees and see what their personal feelings are about the company, and whether or not they have had a pleasurable or productive experience in their dealings with management.
4. Satisfied Franchisees
Speak to other franchise owner-operators, and see how they feel about the experience with the company. Make it a point to speak to a mix of both current and former franchisees, and ask them for their honest opinions about their time as a franchisee.
Get details about their experience so far, or details about why they ended their franchise. Another really useful question is to ask them if they would do it again, given the chance and if so, that’s a strong endorsement. These conversations can make all the difference, and they can be done via email, text, phone, or even a 5-minute zoom call.
Do a quick case search online, and see how many legal cases there have been between corporate and franchisees. A large number of the franchisor acting as the defendant is probably not an encouraging sign. The same can be said for an abundance of the franchisor suing franchisees, that can indicate a franchisor that is overbearing or difficult to work with.
5. Sound Financials
Another crucial sign to look at is any and all financial data that the franchisor can provide. Preferably this will be data from both corporate stores as well as from franchisees. This should often include a business plan or a detailed financial model, as well as P&Ls for other units If it helps, break it down into more manageable data, look at how many of your products or services you will need to sell or how many clients will need to be seen at what average cost to ensure your costs and overhead are covered.
Make sure that the franchisor has sound financial management principles. Ensure that they have the resources and personnel to not just stay afloat, but to thrive and drive growth in today’s economy. With the volatility and uncertainty of the world, make sure they aren’t laden with excessive debt, and having a healthy cash reserve would also make them look stronger.
This is a good opportunity to examine the profitability across multiple markets or geographic areas since there will undoubtedly be variance. This can help you identify potential upsides and downsides for your potential location. For example, food courts in shopping malls will have vastly different foot traffic during the week than on the weekends, and operating costs could outweigh the potential benefits.