Top 10 Criteria for Selecting a Franchise

Top 10 Criteria for Selecting a Franchise

Watch our video to discover the top 10 most important criteria for selecting a U.S. franchise.

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00:00 Top 10 Franchise Metrics
00:12 Investment amount
00:26 Revenues
01:05 Net income
01:34 Franchise failure rate
02:14 Franchise sales rate
02:49 Franchise success ratio
03:25 Franchise data
04:10 Working capital
05:03 ¿How many work hours?
05:36 Transfer rate
06:57 Conclusion

Hey, you have Patrick again here with Vetted Biz and Visa Franchise. Just wanted to give an update on the top 10 criteria for franchising you need to consider before investing in our franchise. Let’s get right into it.

Investment Amount
Number one is the investment amount. You’re generally gonna find the investment range to open up a franchise, including the franchise fee, working capital, any real estate expenses in the franchise disclosure document, also called the FDD.

Another important item is the revenues. How much money are you making from this franchise in terms of how much money comes into the franchise location? Sales, revenue, outside of the U.S., they call it turnover. Sixty percent of franchises disclose financial information, generally at least the sales information in Item 19 of the FDD. If the franchisor does not disclose sales information, it’s very important that you consult directly with multiple franchisees. We recommend you speak to at least five franchisees to better understand the financial information.

Net Income
Leading into the third point, how much money does it make in terms of net income, owner’s benefit? How much are you making from the business to benefit you and your family? Very important. Oftentimes it’s disclosed in the franchise disclosure document. However, you need to talk to franchisees to better understand how much they’re making in Year 1, Year 2, Year 3, and what the general trend is for income generation for that set franchise.

Franchise Failure Rate
Number four, the franchise failure rate. You need to know how many franchises are closing down. How many franchises are not extending after the initial 10-year term? How many franchises broke their agreement with the franchisor and basically the relationship didn’t make sense? You need to understand what the franchise failure rate is. This can range anywhere in a 3-year period from as low as 0% up to 20% plus. Some big names like Subway have a franchise failure rate above 15% over a rolling 3-year period. That’s definitely a big red flag.

Franchise Sales Rate
Another important figure, number five is the franchise sales rate, basically the transfer rate, as well as the franchisor buying back locations from franchisees. This is important as it can indicate that people don’t want to continue to grow with the franchise system and they prefer to move on to some other entrepreneurial venture. Again, going to Subway, the transfer rate’s above 15% on a 3-year rolling basis. That’s pretty high. That basically for every 100 franchises, 15 of them are getting out of the system.

Franchise Success Ratio
Number six, the franchise success ratio. We’ve coined this term looking at hundreds of thousands of small business administration loans that have been issued to franchisees throughout the United States. So, we look at the ratio as this, for every, say, 10 loans that were paid in full, where the franchisee was able to pay back the loan totally to the bank, maybe one defaulted. So, that would be a 10 to 1 loan success ratio for that set franchise…

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