How to Fully Investigate a Restaurant Franchise

Make sure you can profit and succeed before you invest in their brand and system!

If the answers come down on the side of a restaurant franchise or you are still in the consideration phase then the next step is to thoroughly investigate whatever franchise systems are considering.

The first step is to request a legal document called a Franchise Offering Circular. This is a document prepared by lawyers for the franchise which must disclose certain facts about the franchise and is legally required to be prepared (in the US) and presented to any potential franchisee before they become a franchise owner.

The most important thing you can do with this document is to locate the names of current franchise owners and give them a call to discuss the business.

Unfortunately this is a step that many potential franchisees skip. The franchise obviously wants to put their restaurants on their system and the best possible light and so the story here from them tends to be all positive about successes. The best information however comes from the owners of the actual franchises who can tell you what it's like operating the day-to-day.

Your best bet is to call and talk to as many as you possibly can. You should aim to talk to both newer franchise owners who can give you a good feel for what the startup process is like as well as what the most current training and support is like. You should also speak with veteran franchise owners who can give you feedback on the ups and downs of being a business owner and how the investment has worked out for them over the long term.

Realize that when you speak with these owners you are going to see two kinds of bias. Most of the new owners are still going to be upbeat about things because they are still hopeful about earning their investment back and being new to things they are going to still feel that the franchise system has been very worthwhile in getting them going.

The older franchisees are going to be more biased against the franchise because they will have long forgotten the startup phase and everything they got from it and they will be more cognizant of the royalty payments they have to make which they may not feel like the franchise is still "earning".

Of course these are generalizations and some new owners will be bitter and some older owners will still be very loyal to the system. Just keep in mind each person is going to have some bias and you have to factor that in to what they are saying as you consider their answers.

You most definitely want to speak with owners in your same region and preferably as close to where you expect to have your own location is possible. It will be much less helpful to hear the experiences of someone Who is located in the northeast when your restaurant is going to be located in the southwest. Even from state to state that can be significant variations in how restaurants operate.

Here are some questions you can ask of the franchise owners to speak with:

Also be sure to give them plenty of opportunity to ramble- they will often end up answering some of the questions before you have asked them and they will also often drop important pieces of information about things that you weren't going to ask or wouldn't have thought of asking.

Another thing to carefully investigate is how many of the unit's in this particular franchise have either closed or been sold by the original owner or been taken back over by the parent company. This can be an indication of how well the franchise is actually doing how profitable it is for the owners.

You can also take a look and see if any of the franchises are listed for sale on business for sale websites. Often times these listings will show a gross sales number and a net profit number which can again give you an indication of how all these businesses perform in the real world.

The franchise offering circular will not disclose the specific profits of any location or make income earnings claims. What you can do is determine the gross sales of the average sized unit in your area along with some of the largest expense numbers such as the percentage of labor cost and the percentage of food costs and add in your own figures for the cost of the lease and some of the other large expenses and then use financial software to determine about what you can expect your profits to be.

Some of the franchise owners to speak with the very honest and giving you the results and others will only hint around about it but through a combination of these methods you can generally get a pretty accurate picture of what you can expect to make.

It is then your job to determine whether or not based on the overall considerations a restaurant franchise is the right way to go terms of the risk and the reward of owning this type of restaurant.

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