Before buying a franchise, it is good to get as many outside perspectives as possible. You need to make an informed buying decision, and this means that you should not rely solely on the information the franchisor provides.
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Be Cautious About Relying on Franchise Rankings
One way to learn about a franchise opportunity is to research its rankings and ratings online. Several media outlets publish annual lists of ‘top-rated’ franchises, from franchise industry publications to Entrepreneur Magazine.
But, while researching ratings, make sure you know where you are getting your information. Many ‘top-rated’ franchise lists are pay-for-play, and franchisors can get highly ranked simply by paying for the privilege.
Most major media outlets that publish annual franchise rankings will also publish their methodologies—usually referenced at the bottom of the page. Check what factors influenced the rankings, including if payment was part of inclusion. This will allow you to decide how much weight—if any—to give a particular rating or review.
Other (and Often Better) Sources of Information for Prospective Franchisees
1. Current Franchisees
One of the best ways to learn about top-rated franchises is to speak with franchisees who are currently in the system. You should be able to find a list of current franchisees in an exhibit at the back of the franchisor’s Franchise Disclosure Document (FDD). Seek out as many current franchisees as possible—including franchisees in your geographic area; franchisees in cities of similar size, population and demographics; recently opened franchisees (or are still in the pre-opening stage); and franchisees who have been in business for several years.
2. Former Franchisees
Along with current franchisees, former franchisees can provide invaluable insights as well. You should be able to find a list of recently departed franchisees on the back of the franchisor’s FDD. When speaking with former franchisees, you will want to ask questions such as: Why did you leave the system? Would you do it again if you had the opportunity? What is the biggest lesson you learned as a franchisee?
3. News Articles
While franchise ratings and reviews can be biased, news articles from trusted media outlets should serve as reliable sources of information. When considering a franchise opportunity, do a simple web search for the franchised brand and see what comes up. Generally speaking, no news is good news in this regard. But, if your search returns negative coverage or a list of complaints, then this may be a sign that you should consider a different franchise opportunity.
4. Franchise Consultants
If this is your first time considering a franchise, you may want to work with a consultant. Franchise consultants work with prospective franchisees to help them evaluate their options, formulate their business plans, and work toward opening their franchises for business. If you think you might be interested in working with a franchise consultant, always do your research.
5. Franchise Lawyers
Working with an experienced franchise lawyer is critical when evaluating a franchise opportunity and going through the franchise buying process. An experienced franchise lawyer will be able to offer decades of insights—including potential insights about your chosen franchise opportunity. Your franchise lawyer can also review the FDD and franchise agreement in detail—and let you know if there are any red flags of which you need to be aware.
6. The FDD and Franchise Agreement
While you can (and should) hire a franchise lawyer to review the FDD and franchise agreement, you should review these documents yourself as well. Are the documents organized and easy to understand? Do the franchisor’s executives have relevant experience? Is the franchisor in bankruptcy or litigation? These are just a few of the numerous factors you should consider.
7. Court Records
If the franchisor is in bankruptcy or litigation, you may want to have your franchise lawyer review the relevant court records. While some legal proceedings may be relatively unimportant to your franchise opportunity, others could present viability risks for the entire franchise system. If the franchisor is at risk of going out of business, this is something you need to know.
8. Your State’s Franchise Regulator
In several states, franchisors are required to register their FDDs before offering franchises to prospective franchisees. If you live in one of these states, you can check to see if your franchisor is registered as required. While registration isn’t necessarily a sign of quality, if your chosen franchisor isn’t registered, its non-compliance should be a major red flag.
9. Competing Franchisors
Finally, take time to evaluate the franchisor’s competitors. Just because one franchisor appears on a list of ‘top-rated’ franchises and another does not, this does not necessarily mean that the former presents a better opportunity than the latter. Compare initial franchise fees, royalty fees, system growth and various factors to make an informed decision about which opportunity is best based for you.