Five Things Potential Franchisees Should Do Before Signing

Due diligence is crucial when deciding to buy a franchise. No one knows that better than Pete Lindsey. Twenty-four years ago he began his career as a franchise owner. Today, he is Vice President of Franchising at Sport Clips Haircuts.

From owning a single business to helping thousands of people become owners themselves, Lindsey understands the franchising process from beginning to end. Having walked the road himself, he has exclusive insight that comes from the experience he now offers to franchisees who are at the beginning of their journey.

Until 1991, Lindsey owned a Mail Boxes Etc. franchise in National City, California. After establishing a successful business and serving as the president of the local advertising co-op, MBE made him a key member of their operations department. There Lindsey was instrumental in one of the largest franchise rebranding efforts in history: when Mail Boxes Etc. transitioned into The UPS Store.

He made his move to Sport Clips in 2011 for a simple reason: “I saw the direction Sport Clips was heading and wanted to be a part of it. I respect what Gordon Logan [Sport Clips CEO] is doing with the brand and am ecstatic to be a part of a family-run organization.”

Drawing from his wide-ranging experience, Lindsey shares five things he would look for in a franchise if he were starting as a franchise owner in 2017. His insight provides an invaluable look at what franchisees should consider when evaluating business opportunities.

5 Things to Consider Before Signing A Franchise Agreement

1. Consider Quality of Life

Potential owners should understand the quality of life the brand offers. For example, Sport Clips offers a semi-absentee business model, which requires less in-store time from you. On the flip side, owner-operated franchises require the owner to be hands on with the day-to-day operations of the business. In addition to time commitment, certain businesses provide different levels of potential profit margins and revenue. More importantly, make sure the goals of the brand match up with your own goals. As long as those are aligned, long-term prosperity will be much more attainable—and enjoyable. To learn more about the different types of franchise ownership and how they match up with your personal and financial goals click here.

2. Review Company Store Operations and Financial Performance

If the franchisor operates their own stores, examine how these stores operate to gain powerful insight into the business. Are their stores more or less successful than their franchised locations? Do they operate in markets side-by-side with their franchisees or do they operate in designated markets to avoid direct competition? A strong financial performance representation in Item 19 of the franchisor’s Financial Disclosure Document (FDD) should provide enough detail to allow you to create a pro-forma that will provide an idea of future financial performance. Use this information to validate with existing franchisee’s to ensure your projections are in line with their actual experience. While it is not mandatory for a franchisor to disclose this information, if an FDD does not have an Item 19, that should raise some questions.

3. See How Many Existing Franchisees Are Expanding

Franchisee expansion is a good sign. When existing owners are spending their resources on expanding their business, the local market is healthy and the franchisees are happy with their investment decisions. Talk to the franchisor’s representative about existing franchisee growth records. How many franchisees own multiple units and how many units does the average and/or largest franchisee operate?

4. Pay Close Attention to Item 20 in the Franchise Disclosure Document

Item 20 displays how many locations opened, closed, chose not to renew, or were terminated in the prior three years. This information is broken down by state and will give a clear look at how the brand is growing. Item 20 can also provide insight into the “personality” of the franchisor. A large number of terminations or non-renewals may suggest a combative franchisor-franchisee relationship. A large number of closures may suggest widespread or regional operational challenges and is something you’ll want to investigate thoroughly.

5. Check the Franchise’s Transfer Rate

Also in Item 20, you will find the number of franchise transfers by state. It is important to look at this rate in context. First, understand transfers are not inherently a negative thing. There are many reasons a franchisee may decide to sell. Life changes happen, successful owners decide to cash-out on their investments and, yes, some franchisees may be struggling or simply decide the model isn’t right for them. In any case, a low transfer rate may suggest franchisees who want to sell are having a difficult time finding prospective buyers. A high rate may suggest a lot of unhappy owners are looking to get out. Look for a healthy percentage between four and eight percent of the brand’s total number of locations. If existing franchises are buying the stores, this could be a very good sign.

Conducting a due diligence before entering into a franchise agreement will better position you to make an informed decision. With these five tips from a seasoned franchising expert you should be in a better position to evaluate any opportunity before signing a franchise agreement. To learn more about what Sport Clips has to offer and what it means to be part of our team contact us here.