Sizing Them Up: 10 Tips For Evaluating Franchise Brands

Ellen Hui spent years as a multi-brand franchisee in the San Francisco Bay area. Following the sale of her business, she has turned to helping franchisors and franchisees improve their operational efficiencies. And with her background in banking, she's also astute on the financial side. We asked what she looks for when researching brands.

Here are her 10 tips on how to evaluate a new brand.

1. I start with the FDD and read it thoroughly. How detailed is the Item 19?
2. I visit locations when possible of the brand I am buying) When I visit, I always walk and observe everything. What are the customers buying? How clean is the store? Is it properly stocked? How well are the employees trained? Then I become a customer and buy something, or a few things, and ask for help from the employees for suggestions. I look for smiles. Are they genuine? My visit is important if it's a franchise store, and if it's a corporate location I give my experience more weight in my decision.
3. I call (and more often than not, will meet with) operators in the area I am considering, as well as operators in other parts of the country. Nothing can replace the face-to-face time with an operator. It can be expensive, but if you're serious about your investment it's better to be a few dollars lighter here than in a partnership you might regret. Many of the operators are willing to give you high-level details of their financial performance. It's a great opportunity to compare how they are doing versus the financials in Item 19.
4. I attend a discovery day to meet the department heads, possibly the CEO or COO, and there usually are other potential franchisees there. What a great opportunity to get their insights and find out what potential franchisees think.
5. How is their new franchisee training program? Does the company have advisory boards for marketing? Operations? Supply chain?
6. Marketing fund. How much is it? How is it used? Does any percentage of it come back to the operator for local area marketing? If not, then it's more money an operator has to spend for coupons or flyers on top of the ad fund. How much of the ad fund is for national advertising? How do they spend it (TV, cable, radio, print)?
7. Something we should always plan on: the exit. For whatever reason, if you can't run your franchise any longer (sickness, death, other unforeseen circumstances) and need to sell, what is the personal royalty guarantee? Three years? Five years? The life of the franchise agreement?
8. Early termination. You open your location and things don't work out, e.g., bad location, big changes in traffic patterns, the major employer in town goes dark, bad economy. Is there a payout to the franchisor? How much is it?
9. Really give the brand a good hard look. How many in the CEO position in the past X years? Is the brand privately or publicly owned? Bankruptcies (it works both ways)? How will the brand stay competitive and relevant in the coming years?
10. In reviewing financial statements, every number is important. I find the COGS, fully loaded labor, and real estate cost can be the deal breaker!