How to Select the Right Franchise for Your Goals

Introduction

Hey, Patrick here from Vetted Biz and Visa Franchise. Today, I want to share an update on the top 10 franchise metrics you need to consider before investing in a franchise. Let’s get right into it!

Investment Amount

• Details in the FDD: The investment range to open a franchise includes the franchise fee, working capital, and real estate expenses, which you can find in the Franchise Disclosure Document (FDD).

Revenues

• Sales Information: It’s crucial to know how much money the franchise is making in terms of revenue. Sales information is generally disclosed in Item 19 of the FDD. If not available, consult multiple franchisees—at least five—to understand revenue trends.

Net Income

• Owner’s Benefit: Understand the net income, often referred to as the owner’s benefit, which indicates how much you can expect to earn. Talking to franchisees will help you understand income generation trends over time.

Franchise Failure Rate

• Understanding Risk: The franchise failure rate is a key metric that shows how many franchises are closing or not extending after the initial term. Failure rates can vary, and a high rate, like Subway’s above 15%, could be a red flag.

Franchise Sales Rate

• Transfer Rate: This measures how many franchises change ownership, either through sale or franchisor buyback. A high transfer rate might indicate dissatisfaction or a desire among franchisees to exit the system.

Franchise Success Ratio

• Loan Success Ratio: This ratio measures the number of loans successfully paid back versus those that defaulted, providing insight into franchisee financial stability. Industry-specific data can also help you understand how franchises perform compared to others.

Franchise Data

• Industry Comparisons: Looking at industry-level data helps you compare the franchise’s performance with others in the same sector, such as food and beverage, health care, or real estate.

Working Capital

• Additional Capital Needs: Understand how much additional capital is needed until you break even. Some franchisors list only three months of working capital in Item 7, which might not be sufficient, according to our research at Vetted Biz.

Work Hours

• Franchisee Time Commitment: The number of hours franchisees work impacts income and return on time invested. Speak to current franchisees to understand their work hours during the first year, 18 months, and beyond.

Transfer Rate

• Planning Your Exit: Know the average resale value or range for that franchise. Seek recent resale data from the franchisor to understand potential returns, and aim for at least a 2x return on your invested capital.

Conclusion

These are some key metrics to consider when evaluating a franchise investment. For more detailed insights, check out our database at Vetted Biz.