How to Research a Franchise Before You Invest
Investing in a franchise is an exciting step toward business ownership, but jumping in without proper research can lead to costly mistakes. Not all franchises are created equal, and while some offer strong brand recognition, proven business models, and ongoing support, others may come with hidden challenges that can hinder success.
Aside from choosing the right franchise, you also need to consider franchise funding options and whether franchising is the right path for your business. Understanding how to finance your franchise—whether through personal savings, SBA loans, or alternative funding like Rollovers for Business Startups (ROBS)—is crucial to making a confident investment.
So, how do you research a franchise effectively? The key lies in gathering information from multiple reliable sources and using that data to make an informed decision. In this guide, we will walk you through 5 essential steps to conducting proper franchise research so you can invest with confidence.
Step 1: Review the Franchise Disclosure Document (FDD) Carefully
This legal document, required by the Federal Trade Commission (FTC), provides a comprehensive breakdown of the franchise system, including:
- Franchisor Background – Learn about the company's history, leadership team, and overall business reputation.
- Litigation and Bankruptcy History – Check if the franchisor has been involved in lawsuits or financial troubles.
- Initial Investment – Understand the upfront costs required to start the franchise, including franchise fees, equipment, and setup expenses.
- Ongoing Fees – Review recurring costs such as royalties, marketing fees, and operational expenses.
- Financial Performance Representations – Some franchisors provide details on how their franchise locations perform financially, helping you set realistic expectations.
- Franchisee Obligations – Outlines what is required from you as a franchisee, including operational standards, territory restrictions, and renewal terms.
- Analyze Item 19 for Real Earnings Data – Analyze Item 19 for real earnings data, but remember, the FDD is just a glimpse. The real information that helps lead to informed determinations will be found from speaking with other owners within a particular brand.
If you haven't reviewed the FDD in detail, you may be missing key red flags. We always suggest to our clients that if you are at the point in your due diligence where you want to move forward, you should always consult a franchise attorney to review the FDD. Bringing in professionals where necessary may be an unanticipated upfront cost but a small investment to protect yourself.
Step 2: Speak with 2-3 Franchisees
One of the best ways to research a franchise is to talk directly to those who have firsthand experience—the franchisees.
Why Speak to Franchisees?
- Gain Honest Insights – Current franchisees can provide real-world perspectives on daily operations, profitability, and challenges.
- Understand Support Systems – Learn how responsive and helpful the franchisor is when it comes to training, marketing, and problem-solving.
- Check for Red Flags – If multiple franchisees express frustration over hidden fees, lack of support, or unrealistic profit expectations, take this as a warning sign.
Key Questions to Ask a Franchisor's Existing Franchisees
- Would you invest in this franchise again? Why or why not?
- How long did it take you to become profitable?
- What kind of support does the franchisor provide?
- Have you faced any unexpected challenges or hidden costs?
- Is there a strong sense of community and support among franchisees?
Furthermore, reaching out to former franchisees who have left the system can provide insight into why they exited and whether their experience was positive or negative.
Step 3: Research the Industry and Market Trends
A franchise may have a strong brand, but that does not guarantee success in every market. Understanding industry trends and local demand is essential to making a wise investment.
How to Analyze the Market
- Check Industry Growth Projections – Look at reports from sources like IBISWorld, Statista, or the International Franchise Association (IFA) to see if the industry is expanding or declining.
- Evaluate Local Demand – A successful franchise in one city may struggle in another. Research customer demographics, competitors, and regional economic conditions.
- Assess Competitive Landscape – Identify competing businesses in your area. If the market is already saturated, your franchise may have a harder time standing out.
- Understand Consumer Behavior – Is there a growing trend in customer preferences that could impact the franchise? For example, a healthy fast-casual restaurant franchise might do well in urban areas with health-conscious consumers but struggle in a small town where fast food dominates.
Testing demand by conducting local surveys, analyzing foot traffic at competitor locations, or running small online ads to gauge interest can provide valuable insights.
Step 4: Evaluate the Franchisor's Training and Support System
A great franchise is not just about a recognizable brand—it is also about the level of support you receive. Before signing an agreement, make sure you fully understand the training, operational guidance, and marketing assistance provided by the franchisor.
Key Areas to Assess
- Initial Training: Does the franchisor provide comprehensive training on business operations, sales, and management?
- Ongoing Support: Will you receive continuous training, mentorship, or access to business consultants?
- Marketing and Advertising: Does the franchisor help with branding, digital marketing, and local promotions?
- Supply Chain and Vendor Relationships: Will you have exclusive deals with suppliers, or will you need to source materials independently?
A strong support system can make a significant difference in your success, especially if you are new to the industry.
Work with a Franchise Consultant
A franchise consultant can help you:
1. Identify opportunities you may not have thought of on your own.
2. Research available opportunities while you maintain your 9-5.
3. Assist in connecting you with the proper professionals for funding and analysis to understand the prospective opportunity.
Take the Next Step with Confidence
Investing in a franchise is a strategic move that requires careful research and planning. By following this franchise due diligence checklist, you can confidently assess opportunities, avoid pitfalls, and choose a franchise that aligns with your financial goals and lifestyle.
At Paradigm Franchising, we help franchise buyers navigate the research process, analyze FDDs with guidance from franchise attorneys, and compare opportunities to ensure they align with your personal and professional goals. Our main objective is to make sure our clients are making well-informed determinations.
For a free franchise consultation, contact us today and take your first step towards business ownership with confidence.