Step 2 – Evaluate the Franchisor

As a prospective franchisee, evaluating a franchise system may seem a daunting proposition. It is recommended that prior to expending resources negotiating with a franchisor, you first make sure that this opportunity is for you, both from a financial and lifestyle perspective. There are several sources and methods of evaluating the franchise opportunity, including:

Disclosure Documents

An excellent source of information about a franchise system, and a franchisor, can be harvested from a disclosure document. In general, the disclosure document will provide written information about the history of the franchise, financial performance and other material information important to prospective franchisee’s ultimate decision as to whether to buy the franchise. You should strongly consider meeting with your legal and business advisor in order to get their impartial and critical opinion as to the contents of the disclosure document. Disclosure documents are valuable tools to allow one to compare franchise opportunities.

Current and Terminated Franchisees of the Franchisor

Information about the franchisor’s support, commitment, integrity, business acumen, etc. should be readily available from the existing and previous franchisees in the system. By speaking to a range of franchisees (from most successful to least successful), a prospective franchisee should obtain a clear perception on the franchisor and the franchise opportunity. Contact information for franchisees is available in the disclosure document.

Associations

Associations such as the Canadian Franchise Association (“CFA”) are an excellent source of information about franchisors. The CFA may have information regarding previous complaints, membership standing with CFA, as well as competitors of the franchisor.

Industry Publications

There are number of franchise magazines, including Canadian Opportunities, which provide ongoing analyses on the franchise industry in general and feature articles on specific franchises. Franchise rankings which are published, however, should be used only as an aid in your evaluation and should not be relied upon as the foundation for your decision.

Credit Rating Services

Credit rating services should not be overlooked as an evaluation tool, particularly in respect of a non-public franchising company.

Business References

Though it is always recommended to request a list of references from the franchisor, a prospective franchisee may also want to contact others not listed with whom the franchisor does business.

Competitors

In order to analyse a franchisor’s strengths and weaknesses, it may be very helpful to contact the franchisor’s competitors.

Trade Shows and Expos

Franchise and business opportunity trade shows provide a great opportunity to meet a number of franchisors at the same time.

Franchise Consultants

There are numerous franchise consulting companies and independent consultants who can provide a wealth of information on either the franchise industry or a specific franchisor.

The Internet

There are a great number of franchise specific websites that will assist you in researching the franchise industry.

In conclusion, there are several sources and methods for evaluating a franchisor’s history as well as the franchise system. The prospective franchisee should review all of the information and have it evaluated by experienced legal and business advisors.