December 16, 2019
The world of franchising is a competitive one that covers most industries, and within each industry there can be hundreds of potential choices. In the restaurant space alone, comprised of fast food, fast causal, casual dining, premium casual, family style, fine dining and a host of more niche segments, there are hundreds of franchise opportunities. So, when you start looking around, what should you be looking at? Other than the product, why buy a concept if you wouldn’t buy the product, we have outlined 5 key things you should be looking at when assessing your investment dollars and the wagon you’d like to hitch yourself to for the long haul.
1. Average Unit Volume (AUV)
It is explicitly illegal to make any sort of earnings claim with regards to franchise opportunities, so first and foremost know if any franchisor is making claims about the pot of money awaiting you that it is within your right to seek recompense should the deal not work out as was claimed. The important figure you should be working with is AUV, which is essentially the average gross sales of the franchise. There can be certain guardrails on an AUV, basing it on restaurants that have been open for at least a certain number of years is a common stipulation, so be sure to get the details of the AUV you are being quoted.
2. Food & Labor Costs
The cost of building a sandwich is not nearly as cut-and-dry as many think it is. The cost of building each sandwich that our guests enjoy, or any product any restaurant is serving, is comprised of the cost of the initial ingredients, negotiated discounts on those products, paper goods to serve it, rebate dollars, the average wage of employees building the sandwich and the number of employees it takes to operate the line. All of these are largely predetermined by the franchisor. These will be, to some extent, non-negotiable with regards to your bottom line. There are only so many employees you can cut in each shift to save on labor, and if you’re saving more on your food costs than your peers, you’re probably skimping the customer and sidestepping the standard you bought into. This information, coupled with the AUV you were quoted, can help you understand your potential cash flow when you open.
3. Support Systems
Do they have any? You would be surprised by the number of franchises that lend you a name and a logo with little to no attention outside of that. What you should be sure to clarify is the amount of marketing and operations assistance you will be getting. Getting a hard answer, like 5 hours per month, will probably be impossible. However, knowing ad dollars will be spent in your trade area, that you have potential to be given extra marketing attention in times of competitive intrusion, sharp sales declines, etc., that there is a robust training regimen and that there will always be access to more specified training opportunities will assure you that you are investing in a partner, not just a label.
4. Franchisee Accessibility
If you ask to speak with current franchisees, how does the franchisor react? Are they hesitant? Do they only have one that, “has given us the okay to share his/her info,” with prospects? These can all be red flags. Franchisees are benefited when a concept grows. As the brand spreads to more and more places, it becomes more well-known and more top of mind for consumers. So, it should be no wonder why they would want to sell the brand they bought into. If you’re getting push-back when trying to contact franchisees, it may be because they aren’t feeling so good about their investment.
5. Likability
Yes, we mean this very sincerely. Do you like the people you have met and spoken with at the concept you are reviewing? You’d better, because once your name is on the bottom line of that Franchise Agreement, you are going to have to deal with them regularly for years. We’re not saying you need to be drinking buddies or swap dog pictures with each other on Facebook, but you should be able to talk about something other than work without desperately wanting to hang up on them. A franchisor is there to help you make money. A good franchisor does it without a headache.