Important But Less Discussed Issues to Investigate Before Investing in a Franchise

Stock Price Versus Franchise Ownership ROI. Some of the largest franchise brands have publicly traded stocks. Do not assume that stock price trends directly relate to franchise ownership ROI. There are many larger brands where the stock price for the franchisor has gone up over the last 3-4 years, yet franchise owners complain of lower and lower returns. Remember, almost all franchisors charge a royalty on revenue not operating profit.

Make sure you are asking franchise owners about financial trends and whether their operating profit is going up or down. 

Historical Brands. Many big brands that have been around a long time do not offer a good ROI. Sounds crazy to think that a brand could have thousands of locations and a 30+ year history and not be a good investment today.

Remember, when you start a franchise today you are looking for something with a good ROI for the next 10 years, not something that peaked 10 years ago. History and size doesn’t guarantee success. And, do not be overly impressed by the awards they win. Examples of brands low on my list: Subway, 7-11, UPS Stores.

Again, make sure you discuss financial performance and biggest challenges with franchise owners. 

New Brands. Most new brands are undercapitalized in dollars and talent. When you are one of the first to invest in a newer franchise brand, then you are taking high venture capital risk without the upside.

Look for indicators that a brand is near a tipping point: 4+ years in business, 20+ units operating, good unit economics, money on the franchisor balance sheet, executives with national franchise management experience, strong team both internally and via 3rd party companies to support growth.

Impact of Millennials. The Millennials are increasingly more important to the profitability of franchise brands. Franchisors need well-developed plans to capitalize on this age group. For example, franchisors must drive a sophisticated digital marketing plan.

Ask franchisor and franchise owners how important Millennials are to the success of the brand? What are they doing to attract and retain Millennials?

Delivery Disrupters. The market is flush with delivery disrupters such as UberEATS and Amazon that will affect more and more brick and mortar brands, especially food related. UberEATS is sucking 20% of revenue away from restaurants, making delivery a breakeven/ loss leader for many brands. This may potentially force brands to substantially revamp their core operations.

Ask franchisor and franchise owners questions to understand the risk associated with delivery disrupters.

Exit. If you work hard and scale a brand over the next 5 years, what type of exit scenarios exist? Will it be easy to sell? What type of multiples are franchise owners getting (e.g., 4 times EBITDA)? Who are the typical buyers–other franchisees?

Ask the franchisor about the terms of any recent franchise sales.

Get Your Top INSIDER Franchise Picks

Invest five minutes and receive your top insider franchise picks. Top picks vary by region and personal situation. All information is held strictly confidential.