When reviewing a franchise’s Franchise Disclosure Document (FDD), there are a few key items to review and consider. One of the most important is Item 19 of the FDD, where a franchise will share their historical financial performance metrics from the prior year (otherwise known as their financial performance representations or “FPR”).
As a prospective franchisee, it’s important you ask the right questions and look closely at the data as this is likely the largest investment of your life and not all data is represented in the same way across different franchise brands. Brands will get creative in how they represent their financial performance, so it’s important to make sure you do your due diligence.
Here are some helpful steps to consider when evaluating any franchise opportunity:
- Read the fine print: When reviewing an FDD you’ll see franchisors reporting on their averages. Read the fine print to confirm how they calculate this number. Are they including all their outlets or only their top-performing outlets? Never assume that averages are calculated the same way across different franchise brands. Advertisements or promotional materials can be misleading. Always look for the asterisk (*) as a hint and then refer to their Item 19 section. Then ask them why they are promoting an “average” if it is not an actual average.
- Validate with franchisees: It’s helpful to talk to existing franchisees to validate what you read within the FDD. Validation from an existing franchisee can help paint the picture for you beyond what is reported in the FDD, which is data from the previous year.
- Groupings (age cohorts): Take note of the age of individual locations. Stores that are 10+ years old have had time to grow and perfect their business. Study the recently opened stores and their growth. Look at stores under three years old and specifically stores 1-2 years old. These outlets are the important ones to talk to so you can see what your initial success may look like.
- Company/Corporate/Affiliated/Founder store data: Corporate stores often feature normalized data. Check the ages of these corporate or affiliated stores. As mentioned earlier, older stores are only one indicator of success. It means they’ve proven the model, but have they been able to scale effectively? Also, founder/company stores can easily remove costs to improve performance, especially in the early days of a brand’s franchising. Be mindful when reviewing this data and ask questions. Also, make sure to check or review if they are charging themselves the same fees a franchisee would pay (royalties, advertising, etc.). Continue to read the fine print of their data and question how they arrive at their metrics.
- Talk to owners outside of established markets: It is easier to open in older markets where brand awareness is high. See how new locations are doing in a new market as they won’t have the same brand awareness as an older market. This will help you evaluate the brand’s marketing systems and the support you will receive.
- Size of subsets: Check how many outlets are in the group being reported on – is it 5 or 50? In a franchise system, being able to replicate success over and over is vital. Without a scalable model, it can be very hard to replicate success and grow to a large franchise network. A true indicator of a scalable model is being able to see early success. If the group they are reporting on has less than three stores, take note. If the group has 30+ stores, you know they have a model that can be replicated. Keep in mind though, the more outlets in the group can sometimes lower the averages, but it’s a better indicator of the company overall. Expect to see a broader range of performance the larger the size of the subset.
- Model your business around the average and shoot for the high: Ready to be a top performing franchisee? If you can build your business by replicating the top cohort, this will likely drive consistent growth and ROI for yourself. This top tier is also the subset of the business that helps to define success for the franchise system. If you don’t think the top tier is attainable, re-evaluate your desire for the opportunity you are considering.
- Ask them about their “Same-Store Sales” Growth (stores 13+ months): This metric is the true health of any franchise system. This number means that the company generated more sales per store compared to last year. Is the opportunity you’re investigating able to provide this data? If yes, it’s best to look at this data over the last five to seven years.
- Outsourced Sales Teams (aka Franchise Sales Organizations): Are you working with an outside sales team or someone directly in the franchise organization? An inside sales representative is likely a full-time employee, fully understands the brand and franchisees and could also be invested in the brand they are helping to sell. If working with an outside sales time, it’s important for you to recognize that you are not working with an invested employee, but a third party. Often, these third parties are commission-based with a goal of selling you and they may not have your best interest at heart. After you sign, it’s not uncommon for you to never see, hear or talk to the third party again. Since their goal is to get the franchise sale, your future success is not their priority, and this should be part of your decision-making process. Whether working with someone inside or outside the organization, make sure you are speaking with someone who has experience in franchising and is knowledgeable about the brand you are pursuing.
- Selling you more units: Be cautious of those trying to sell you more units or a larger territory than you can afford. Again, most sales reps are commissioned heavily on the upfront purchase and less, or not at all, on future sales. Are they trying to get you to sign for more units in your first transaction? This tactic also helps brands as they report big unit sales.
- Getting stores open: Ask the franchise system about their “Sold Not Open,” commonly referred to as their “SNO.” Have they been able to get the stores open they have sold?
- Existing franchisees buying more: Are existing franchisees signing on to open more units? This is probably the single most important testament to any brand. Be sure to ask how many of their franchise sales are from existing franchisees versus new. Talk to those franchisees who recently bought more to learn more about their experience.
- Stores in compliance with operating systems: Compliance within a franchise system is part of buying into a franchise. Some brands will differentiate in their Item 19 the stores that “follow their system” and stores that do not. This is often another way of normalizing the data and alienating under-performing stores in order to leave them out of the averages. Be aware of this type of approach and why they don’t want to count their entire network of stores. Also consider why they have stores that may not be following their systems but are still operating.
- Leading versus Following: Ultimately decide if you want to be with a brand that’s leading the industry and has an experienced team with a proven track record, or one that is following the leader. Ask how long the franchisor has been in business and how many units they have opened in that time. When comparing brands side by side, this is a helpful way to see who is seeing more success since inception.
- The low-cost alternative pitch: Ever heard the saying, “you get what you pay for?” Forty percent (40%) cheaper is not always better, especially in the pet industry. Pet parents will go to great lengths to care for their pets. If looking at a low-cost alternative, what happens when the leading competitor with a higher quality design/footprint opens next door? Consumers will usually choose the higher quality option with more safety features.
- Culture: A lot of brands report that their culture is their differentiator or that their culture is what makes them successful. You may even hear that the founders are driving the culture and it’s still a “family” business and not a big corporate culture. Culture is important, but so is the growth of the business. As every franchise brand grows, all will get the attention of private equity and may eventually sell as this is how they can liquidate their assets. It’s not uncommon for a brand to sell, so even though the founders claim their culture is not based on being owned by outside investors, this may eventually change as they look to grow the business or bring in different leadership to help guide it forward. If this type of business strategy doesn’t sound appealing, a franchise system may not be the best fit and you may want to look at opening an independent operation.
- Coaching Versus Selling: Your success within a franchise system is ultimately what makes a franchise successful. Any good sales rep should be guiding you through the process with your best interest in mind, not simply trying to sell you.
FRANCHISING WITH DOGTOPIA
These 17 items are just a handful of components to consider when reviewing a franchise opportunity.
If you are interested in beginning your franchise journey with Dogtopia, we encourage you to check out our detailed FAQ page that includes answers to some of our most common franchising questions, and you can also reach out to us via our online inquiry page.