"Question Marks, one is green"

Assessing a franchise opportunity requires clarity on the alignment of your business and personal aspirations and preferences. Further, proper evaluation is critical, as there is more to a franchise opportunity than upfront costs and previous successes.

Look into the franchisor’s history, and ask the right questions

You should ensure that the franchisor has proven systems in place, such as marketing, payroll, training, and mentoring, to provide the best chance for success. Another consideration is, are you the first franchisee? How many franchised locations are there, and how long has the franchisor been in business? How does the franchisor treat its franchisees? Can you acquire an exclusive territory? If that’s not possible, does that hinder your chances of success?

Feel free to personally interview existing franchisees to find out answers to these relevant questions. Don’t be afraid to ask tough questions to find out what it’s really like to be a franchisee. Further, existing franchisors should be willing to mentor newbies; if not, be wary.

Ask for a comprehensive package of financial statements and relevant metrics from the franchisor, and review them with your accountant/business advisor.

Closely examine the Franchise Disclosure Document

Ask to see the franchise agreement, but before you review this agreement, be sure to read and understand the content of the Franchise Disclosure Document, which franchisors are required to provide to prospective franchisees before they sign a franchise agreement. Further, align yourself with an experienced franchise lawyer prior to reviewing any documents provided by the franchisor. The franchise agreement may also contain hidden fees in addition to the royalty payments, such as required marketing fees or training.

Determine your level of independence

When evaluating a franchising opportunity, you should determine if you are comfortable with the extent to which you can modify operations. Quite often, franchises have strict rules on how to operate the business. Make sure you are comfortable with what you are and are not allowed to change.

How deeply vested is the franchisor in their suppliers? This is one question everyone overlooks. If the franchisor has stakes in their suppliers, you are guaranteed to pay higher prices for the same goods that you could source more cost-effectively elsewhere

Franchising can be a very successful way of getting into and growing a business, but many issues can exist in any franchise relationship. Be sure you fully understand all of the qualitative aspects and costs of being a franchisee prior to taking the plunge, to ensure that this is the best business decision for you and your family.


The Expert

Ellis Orlan, CPA (IL), CGMA
Principal, Audit & Assurance Group, Fuller Landau LLP

Adapted from an article originally published  in the July/August 2016 issue of FranchiseCanada. Check out our current issue FranchiseCanada, on newsstands now, or you can order your subscription by calling 1-800-665-4232 ext. 224.