Tips for evaluating a franchise opportunity

Although the 2010 outlook calls for little industry growth, franchising remains popular. Experts say, however, that numerous factors must be considered in picking the right franchise to buy.

Bob Purvin, chairman and CEO of the American Association of Franchisees and Dealers in San Diego, says franchising can be a lucrative investment for those who do their homework.

“The more you learn about the selection process, the more successful you will be at understanding what the franchisor is really offering you,” he says.

The Washington, D.C.-based International Franchising Association predicts the industry, following losses in the number of new franchises, jobs and revenue in 2009, will show a flat or marginal increase from this year going into 2010.

Alisa Harrison, with the Washington, D.C.-based International Franchising Association, says there are 90 franchise categories to choose from, including health and wellness, food service and senior care.

“The franchise opportunity you settle upon depends on what part of the country you are in, the needs in your community, consumer demand and the things that interest you,” says Harrison, who advises prospective investors to use the Internet to gather preliminary information.

Search for news stories about companies being examined and begin using the products or services they offer, Harrison says. The curious also can visit the association’s Web site at www.franchise.org where they can look up IFA member companies, find average purchase costs and view contact information.

Purvin says potential investors should verify that the franchise companies they’re interested in are focused on the distribution of products or services, not just the selling of franchises.

Part of evaluating a franchise opportunity, experts say, means having the right people in place to handle due diligence.

Purvin cautions that investors avoid the temptation to cut corners when it comes to due diligence and hiring the right professionals to handle that task. The most critical piece of the evaluation, he says, is finding a financial adviser, CPA and attorney who have a solid understanding of franchising.

The next step is talking to those on the front lines.

“To truly identify which franchise is worthy of your investment, you need to talk to franchisees, including ones that the franchisor doesn’t recommend or who have recently left the system,” Purvin says. “Include some in similar geographic areas, some who’ve been in business three to 12 months, and some who’ve gone through a renewal cycle.”

Purvin touts the importance of having a collaborative culture within a franchise system. “The best companies have proven management philosophies,” he says.

As a rule of thumb, Purvin advises franchise prospects to budget 2 percent to 5 percent of the total investment for due diligence. For example, an attorney is going to cost between $1,500 and $2,000 to review the offering.

“You will be looking at $5,000 to $6,000 in professional expenses to determine if the company is the kind of company you want to partner with,” he says.

The time and money invested upfront will pay dividends in the long term, Purvin says.