My Process to Vet a Franchise
There are 5 big things I'm looking at
In September we signed a massive franchise development deal
There are 3,000+ franchises in the US. Many of them are terrible.
This is my process for vetting a franchisor:
I created a Franchise Due Diligence course where I dive deep into each one of these five sections. I'm giving it away for free to my subscribers. It's short (45 minutes) & packed with value. Click here to sign up.
Here’s how I applied these principles to my deal with That 1 Painter (T1P)
The leadership team is the most important component of a franchise, especially for an emerging brand. The best business model in the world is meaningless if run by a bunch of idiots.
Experience - industry & franchising experience. 10 years painting & 150+ units sold.
Personality - you should feel the leadership team authentically wants to see you succeed, not just sell units.
Size of Team - the corporate team is constantly growing to support the rapid franchise growth.
Corporate Units - they own Austin & recently acquired 16 territories. They plan to operate those following the “investor model” with two 8-unit territories run by Regional Directors.
2. Unit Economics
"Unit economics" means the return on investment. It estimates how much money a single unit can earn vs. the cost to open.
It excludes owner benefits & corporate overhead to keep it simple.
Unfortunately, there is no franchise crystal ball. No one can guarantee you how much money you'll make. Success is 100% based on your ability to hire great people & execute.
In the Due Diligence course I have a whole chapter on building a basic financial model.
T1P costs roughly $100k to open each unit. That includes franchise fee, grand opening marketing, truck down payment, misc start-up expenses & cash in the bank.
If we can make $50k we’d earn 50% return on investment. $100k cash flow = 100% ROI. $150k cash flow = 150% ROI, etc. There's also a chance we lose money. Franchising (if done right) can blow real estate & stocks out of the water.
A low-cost mobile franchise can provide a much quicker return of capital than a $500-750k build-out that could take many years.
You should have a solid understanding of the day-to-day operations as a franchisee.
Training - comprehensive sales, technical, & business training done in-person, in-market, & online.
Support - business & sales coaching, ongoing development of new services, & technology improvements.
Franchise Community - an active community of franchisees sharing best practices, challenges & ideas through Slack/G-Chat/Teams
That 1 Painter delivers on all this. In the Due Diligence course, I dive deeper into a few more items to consider.
4. Franchise Disclosure Document
The FDD lays out all of the information about the franchise. They are written to protect the franchisor & the brand, not the franchisee. As a franchisee, you need to understand & agree to the rules.
The main items I’m looking at:
Legal/Bankruptcy Issues (Items 3 & 4)
Start-Up Costs (Items 5 & 7)
On-Going Fees (Item 6)
Restrictions & Territory (Items 8 & 12)
Renewal, Transfer, Termination (Item 17)
Financial Performance (Item 19)
Unit Growth (Item 20)
You should seek the advice of a franchise-specific attorney to help you review. I can provide some recommendations.
5. Growth Strategy
You need to make sure your growth strategy aligns with the franchisor.
Scalable Model - we can operate 5, 10, 20 locations with unit-level managers, regional managers, COO, etc. The business model has to be simple & successful in any market condition
Franchisor Encourages Growth - some franchisors like T1P encourage & support franchisees to scale. Others are very restrictive.
Real Estate - there are pros & cons to a retail-based business. Given the amount of real estate exposure with Midas, we like the idea of a mobile business with zero real estate.
Exit Strategy - always want to start with a destination, which may change:
Pass on to your kids to operate?
Scale to multi-market & multi-brand?
Sell in 5 years and move on to the next business?
We plan to be a multi-market, multi-unit operator, expanding vertically into other home service brands in the same territories.
The Right Franchise For You
That 1 Painter is a great fit for me given my goals, skills, budget & location. Just because it's good for me doesn't mean it's a good fit for you.
Investing in a franchise is a huge, potentially life-changing event. The best part of franchising is the full spectrum of choices.
My team can help you find that franchise. Book a discovery call here (100% free)
For Franchise Due Diligence check out my course. Click here to sign up (also for free)
Weekly Podcast on franchising: Business with Beers