Why should I consider joining a franchise (as opposed to creating a business from scratch)?

• There are hundreds of franchises in dozens of categories; you can match your abilities, interests, and values to the system that’s right for you
• You can invest in a proven model with a track record you can assess, rather than hoping that a startup may do well
• You get an operations manual to follow – a “playbook” you can run — instead of having to improvise everything yourself
• You can get many kinds of support from the franchisor and your fellow franchisees (you’ll be “in business for yourself but not by yourself”)
• Building a brand image and a base of interested potential customers takes time and money; you can benefit from the image building work that others have done before you

Why should I consider not joining a franchise?

• Joining a franchise system improves your odds but does not guarantee success; there is always risk in operating a business, and accepting that risk is not right for everyone
• If the franchise brand you join is relatively new, the benefits of associating with an established brand are reduced and the risks of failure are generally higher
• Few new franchise owners work only a 9-5 schedule; successful franchisees make a deep personal commitment to their business
• In one or more ways, you’ll have to pay the franchisor for their support; this may involve initial franchise fees, royalty payments, purchase of required materials and supplies, or more
• You’ll be expected to follow established processes and systems; franchising is not for people who want complete independence and freedom of action

How do I match my needs and interests with those of a franchise brand?

• Do your interests and values lead you toward (or away from) certain business sectors?
  • Can you leverage special skills and experience, like an experienced electrician buying a home inspection franchise or a doctor buying an urgent care franchise?
  • Are you comfortable dealing with the general public, or are you more at home in a business-to-business environment?
• How much can you afford to invest without stretching beyond your comfort zone?
• Will you and your family work in the store (working in the business) or will you hire a manager to run daily operations while you handle strategy and oversight (working on the business)?
• A mature franchise brand may not have an open territory available where you live now; are you willing to move for the right opportunity?

What are some ways that I can assess a franchise brand?

The franchisor’s Franchise Disclosure Document (FDD) is a hugely valuable resource; the best way to protect the investment of your dollars is by investing your time in studying that FDD.  But be aware that no federal government agency has certified the information and claims in an FDD.

Here is a partial list of a few of the key questions to ask as you read the FDD and investigate this investment opportunity.  If the initial answers raise concerns, dig in deeper and ask the company and several existing franchisees for details.

• Item 1: Who owns the franchisor?  Is the company long-established?  Well-capitalized?  Is there reason to think the current owners might sell sometime soon (for example, if the company is owned by a Private Equity firm)?
• Item 2: Who runs the franchisor?  Do they have successful experience in relevant companies?  Is there a mix of company veterans and industry insiders plus people with broad perspectives from other companies and industries?
• Item 3: Does the company have a history of serious litigation?
• Item 4: Have the company or its key executives been involved in bankruptcy?
• Items 5 and 6: What fees will the franchisor charge you, both now and later?
• Item 7: How much will it likely cost to start up a franchise?  If there is a wide gap between the highest and lowest potential costs, what factors might drive your costs above the “typical” level?  (For example, does it cost more to open in urban areas?  In certain kinds of storefronts?  How might the specifics of your situation affect your cost vs. the system average?)
• Item 8: Are there certain supplies and materials you must buy, and must you buy them only from specified sources?  Will the franchisor make money from your purchases, either directly or indirectly?  If so, ask several existing franchisees if they feel the products the franchisor requires them to buy are high quality and fairly priced.
• Multiple sections: What things will the franchisor require you to do?  For example, franchisors may require you to invest certain amounts in marketing your business, to cooperate with other franchisees in marketing within your state or region, to remain personally involved in operating your business as long as you own it, to sign a personal guaranty that you will be responsible for certain liabilities of your business even if it closes, to file certain reports and disclose certain information, to use the IT systems they specify, and more.
• Multiple sections: What things will the franchisor prohibit you from doing?  For example, they may prevent you from selling any product or service they have not explicitly approved, from charging prices above or below a level they specify, from continuing in the same line of business if you eventually leave their franchise system, and more.
• Multiple sections: What actions will you need to obtain their approval for?  For example, they may require you to submit any marketing material you develop to them for their review, they may insist on approving any lease you sign, they may reserve the right to approve any relocation of your business, and more.
• Item 11: What is the franchisor committed to do to support you?  For example, they may commit to providing you a specified amount of onsite training and support, with more training time potentially available for an additional fee.  Remember that commitments written in an FDD provide greater assurance than statements made in oral conversations with the franchisor.
• Item 12: In what geographic area (territory) will you be allowed to operate?  Do you have a “protected territory,” or can other franchisees (or the franchisor itself) sell to customers within your territory?   Under what circumstances could another franchisee (or the franchisor itself) open another location close to yours?  How are internet-enabled sales handled (and can the franchisor sell directly online to customers who live in your territory)?
• Items 13 and 14: Has the franchisor carefully protected its trademarks and innovations, or could a competitor start selling similar products in similar ways with a similar brand name?
• Item 17: What would happen if you wanted to transfer, sell, or close your business?
• Item 20: Is there a stable base of experienced franchisees?  Is there a healthy stream of new franchisees coming into the system?  Are most existing franchisees renewing their franchise agreements and maybe even opening new units?  Are large numbers of franchisees leaving the system, either by closing or selling out?  Item 20 contains a full list of current and recent franchisees; contact several of them, particularly those who have left the system, to learn from their experiences.
• Item 19: The fundamental question every prospective franchisee would ideally love to answer is “How much money could I make if I buy this franchise?”  Unfortunately, no one has a crystal ball, and even in long-established businesses with solid track records the performance of individual units can vary widely.  So, no one can honestly give you an unqualified answer about how much money you would make, but Item 19 of the FDD is where the franchisor can choose to make “Financial Performance Representations” that give you some insights into what may be possible.  There is no one prescribed format for making these financial representations:   some franchisors discuss only revenues, while others also discuss costs; some report results from all their franchise locations, while others report only selected subsets.  So, you should read this section carefully, and keep these points in mind:
  • Big revenues may be impressive, but what matters in the end is profit: roughly speaking, the money that’s left after subtracting all your costs from those revenues.  Grocery stores are an example of a business that often has huge sales volumes but profit margins of as little as 1-2%.  A law firm in the same town might have far less revenue but even higher profits than the local grocery.  Focus on what matters.
  • Costs can change significantly throughout the lifecycle of a business and are often highest in the first year. To take only one example, first-year marketing expenses for a new consumer-facing business might be extremely high, then gradually drop as the business becomes known.  As you consider launching a business, be sure you have access to enough cash to sustain you for at least 6-12 months even if the business is delayed in opening or revenues come in more slowly than you anticipate.
  • Costs can also vary widely between locations. If Item 19 doesn’t address costs, speak to several current franchisees whose situations seem generally comparable to yours.
  • Sales volumes can also vary widely, for many reasons. Customers may be more receptive to a particular business concept in some areas than others; a Korean restaurant chain might do better in Los Angeles than in Omaha.  Seasonality may be a factor; a frozen yogurt chain might do steady business year-round in Orlando but slowdown in winter in Minneapolis.  As you estimate how your sales volume might compare to the sales of existing units, try to assess whether the existing stores have important advantages your location wouldn’t.
  • Different franchisors will make Financial Performance Representations in Item 19 in different ways, but if they leave this section completely blank that should prompt serious questions. If the franchisor is new, they may simply not have enough data yet to make reliable representations.  That’s fair, though it’s a reminder that new businesses are generally riskier than well-established ones.  If a franchisor has been operating several years and still chooses not to say anything in writing about their units’ financial performance, you should certainly ask them why and speak to as many of their existing franchisees as possible.  A complete list of their current franchisees, plus any that have left the system recently, is contained in Item 20, so contact several of them.
  • Remember that – with only limited exceptions — no representative of the franchisor is allowed to make any financial representation to you that is not contained in their FDD. Never rely on assurances that aren’t in writing.

What are other ways that I can assess a franchise opportunity?

• Franchisors must attach current financial statements to their FDD. Check these to see if the franchisor has a solid, stable operation with enough financial reserves to effectively support its franchisees.  Also look to see where their revenue comes from.  If most of their revenue comes from royalties paid by existing franchisees, that’s generally a sign of a healthy system with a win-win business model, though of course there are no guarantees.  If a large part of their revenues comes from selling materials or supplies to their franchisees, that can create a potential conflict of interest, where the franchisor could benefit from raising prices or requiring more equipment purchases but franchisees would be hurt.  And if a disproportionate part of the franchisor’s revenue comes from franchise fees collected from the sale of new units, it’s vital to confirm that they are investing appropriately in supporting those franchise units as they open.  Make sure you’re confident this is more than a franchise sales operation.
• These are a few more questions you may want to understand, as you speak with the franchisor leadership and franchisees (current and past). How do existing franchisees feel about the business? Is the franchisor supportive?  Have they lived up to their commitments?  How do franchisees feel about the future?  If they had it all to do over again, would they still invest in this business?
• As you gather feedback from various people, do keep in mind that there are a few disgruntled franchisees in even the most successful systems, just like a few people give 1-star Yelp reviews to the best restaurants in town. Don’t overreact to a few isolated comments good or bad; look for patterns.  And remember that it’s not the franchisor’s job to make franchisees successful; it’s the franchisor’s job to create conditions that provide a strong possibility of success, but every individual franchisee has to work hard, follow the system, and make success happen.  A franchisee’s failure is not always the franchisor’s fault; in fact, it may have come despite the franchisor’s best efforts to help.  Again, don’t read too much into any one data point, but look for patterns that tell a story.
• Is there a Franchisee Advisory Council or other group that represents franchisees in talks with the franchisor? If so, contact them and ask about any important issues under discussion with the franchisor.  But remember that while some Franchisee Advisory Councils are highly independent, in others the members are selected by the franchisor itself and may not offer a truly independent perspective.
• If you have found a franchise opportunity through a franchise broker, remember that few brokers operate as a public service; most are paid a commission by franchise companies to send them prospective candidates like you. Often, franchisors only pay their brokers if their candidate (you) actually buys a franchise.  This may create a financial incentive for the broker to steer you toward a franchise system that may not be perfect for you, so you should not assume that they’re always acting in your interests.  Assess any statements made to you by a broker with the same degree of caution and care you apply to statements coming from the franchisor.
• Effective marketing will be essential to the success of your new business, so evaluate how much help you’ll get from the franchisor. This can vary widely, from giant franchisors who run ads on the Super Bowl all the way down to start-up franchisors who offer their franchisees little more than a logo and a simple company website.  Even in large chains, franchisees normally spend most of the money required to place ads in various media, but if a franchisor doesn’t at least provide effective marketing material in multiple formats ready for you to use locally, you’ll have to spend extra money to create those materials yourself – and the franchisor may retain a right to review and reject the ads and webpages you create.  Keep in mind that the minimum level of marketing spending required by many franchisors is often not enough to successfully launch a new business; expect to spend more, especially in Year One.
• Social media is now a hugely influential marketing channel, so how effective is the franchisor online? What are customers saying about the brand in various social media?
• How tightly does the franchisor control any social media posts you may want to make? While it might seem ideal to have great freedom and flexibility to market any way you like online, be careful what you wish for:  you might operate responsibly, but if the franchisor’s oversight is lax and another franchisee posts something damaging online, your business might be hurt, too.  Assess whether your franchisor has found a good balance between promoting consistent brand positioning across every location on the one hand while still allowing local franchisees to post relevant material and build community engagement on the other hand.
• Some franchisors, particularly in business-to-business sectors, are directly involved in soliciting and even qualifying sales leads for their franchisees. If so, this can be very helpful but ask what this would cost you and what obligations this may impose on your operation.
• You’re probably very conscious of the costs you’ll incur up front to open your business and the costs you’ll incur to operate it every month. But don’t forget that most franchise brands also impose additional costs throughout the lifecycle of a franchise location.  For example, most QSR chains require their franchisees to refresh or even completely remodel their restaurants every few years to keep them looking appealing.  A gym might require its franchisees to replace the exercise machines every few years, even if they’re still in good operating condition.  If the franchisor changes the brand’s logo, you might be required to buy new signage.  Be sure you understand what rights the franchisor has to impose additional costs on your business.  These expenses are often appropriate and helpful, but you need to plan for them.
• Franchise Agreements normally last for a specified term of years (usually 5 or 10). What happens after that?  Will the franchisor permit you to continue the business, sell it, or perhaps pass it down to others in your family?  What conditions or limitations will they impose on your ability to do so?
• If things go well and your business becomes highly successful, will you be allowed to open additional locations? Under what conditions?  Are adjacent territories available, or would expansion require you to move into other geographies?  Would you need to commit extra fees now to “lock up” future expansion territories (and is the franchisor strongly pressuring you to do so)?  If so, can you comfortably afford that extra investment, or would it reduce the funds available to support your first unit, exposing you to extra risk?

Choosing the right franchise is a significant decision that requires thorough research, careful evaluation, and a clear understanding of your goals and risk tolerance. By leveraging resources like the Franchise Disclosure Document, speaking with current and former franchisees, and assessing the franchisor’s support and business model, you can make an informed choice that aligns with your skills, interests, and financial capacity. Franchising offers a unique path to business ownership, but success ultimately depends on your commitment, due diligence, and ability to follow a proven system. Take your time, ask the right questions, and ensure that the franchise you choose is the right fit for your future.

About the Author

David Humphrey has served franchising in many roles.  He spent seven years as CEO of a major franchisee group within the Planet Fitness gym chain, Ignite Fitness Holdings, operating 118 of the 2000+ Planet Fitness gyms.  David also serves as Chairman of Massage Heights Franchising, a 120-unit family-owned upscale spa franchisor; he serves on the Board of Handel’s Ice Cream, a fast-growing franchisor of 100+ ice cream shops; and he serves on the Board of Uni K Wax, a high-quality waxing studio franchise with a unique positioning. As CEO of Massage Envy Spa from 2008-2011, he led the world’s largest spa franchisor, which doubled in size to over 670 locations and 1 million members during his tenure.  He has been a member of IFA’s Board of Directors since 2018 and was the 2023-24 IFA Chair.