I've seen quite a number of posts from folks who have saved up a bit of money, and are wondering about opening a franchise. I owned an ice cream store franchise for 9 years, and provide software to thousands of franchisees who I get to talk to every day, so wanted to lend some hopefully helpful information based on my experiences. My opinions only - feel free to disagree or add yours!Is a franchise the right choice for you?It probably isn't. A lot of people are looking for passive income, and hear the stories of a guy who owns 50 McDonalds and lives on a yacht. That story probably isn't true, and it definitely is not the case if you're starting out. The good franchises have multi-year waitlists; do you think they want the person who is going to put their blood and sweat into the business, or the one that wants to kick back and do nothing?If you want a passive play in restaurants, buy the stocks of the publicly traded ones. Or slightly less passive, buy some commercial real estate that leases to franchises.The people that do well in this business love operations and leading a team. You have to be a person who gets excited by finding a 5 second faster way to do a repetitive task, or working in a rush with a huge backlog of orders. You have to be good with people, and be really thoughtful about the team you want to build. You don't control a lot of the other stuff (menu, processes, sales), so these are what should get you excited.Go in with a 10-year time horizon. You may sell the business or plan to rapidly expand before then, but if you can't see yourself running a single location for 10-years and being okay with that, it's a strong sign this might not be for you.How can I find a good franchise?You probably know them already. There's a top 100 list for a reason. Not all of them on those lists are going in the right direction these days. Here's some common stuff to look for:- Unit Growth - have they consistently grown over the last 5 years? How many stores have closed in that time? Does the growth appear to be sustainable? Be wary of any franchises saying they plan to double in size over the next 1-2 years. That's a recipe for operations nightmares and inconsistency. Definitely avoid any franchises that are contracting.- Multi-unit ownership - get an idea for the split between single-unit owners and multi-unit. A high percentage of single-unit means you are likely buying yourself a job without great prospects. Example: Subway vs. Tim Hortons - both have some big multi-units groups, but the majority of Subways are singles. Some franchises are very hard to expand in unless you come in with huge financial backing already.- Technology Investment - cannot stress this one enough. My franchise talked about a mobile app for 5+ years and it never came out - and they already had a version of it in the US stores. Domino's former CEO famously said they wanted to be a tech company that sells pizza, and they have crushed it in the last 10 years. Look for what the franchisor is investing in. Are they a leader with their own IT team, or just trying to keep up? Food trends change every couple years. If they're not investing in tech themselves, they are on death row and may not even know it yet.- Stable concept - I made this mistake myself, to an extent. There are always hype concepts. Frozen yogurt, juice bars, freakin' dick-shaped waffles. Franchisors get ahold of these and sell franchises to anyone with a check book and a pulse. You might make money with some of these, but at the end of the fad, good luck selling the business and not going down with the ship. Stick to food that can adapt to the trends and has consistent demand. Quality coffee, pizza, chicken, and burgers are boring, just the way you like it.- Stable ownership - who owns the parent? How many concepts do they own? Just one - great. Several (Inspire, RBI) - probably okay but proceed with caution. Many - stay the far far away. There are lots of private equity and buying groups that swallow up a bunch of midsized concepts, consolidate the operations (aka fire most of the corporate support), and try to turn them into cash cows. Focussed ownership means stability and resources for franchisees.- Start-up costs - you may be looking at buying an existing location, but you need to study this no matter what if you want to expand eventually. It's not just about the overall number (that's obvious), but which direction it's going in. This tells you what the franchise is prioritizing. Starbucks isn't a franchise, but is the best example of what to look for; they spend money on what the customers sees from knee to eye, and spend as little as possible anywhere else. Go look at the ceiling or tile in a Starbucks - that's pure utility right there. Bad franchises will have you spend money on really stupid stuff - neon signs, fancy light fixtures, hyper-trendy furniture. This is a sign that the franchise is not prioritizing the franchisee's ability to drive profitability. Good franchises try to drive down build-out costs, or at least keep them stable.How can I do more research?Googling is a good start, but a lot of the information will be very high level. If you're getting really serious, you'll need to get some better insider information.- Spend time in the business. To start, just go sit in one for a whole morning or afternoon. Are there "now hiring" signs everywhere (chronic staffing challenges)? How many customers are coming in? What's the demographic of those people? Are lots of customers using the loyalty app? Do the staff seem happy to be there? Is there an exhausted guy who looks like the owner making your sandwich? This step alone may be enough to tell you that you don't want to go further, so spend the time before you really start to dig in.- Get your hands on the Franchise Disclosure Document. There are databases for these, or if you go through the initial process screening process with a franchise, they will have to provide you with this by law in most places. This is a thick-ass document that lists a metric ton of useful stuff. Parent company financials, pending lawsuits, operations procedures and policies, lists of franchisees, and so on. Read the whole thing, jot down concerns and questions.- Talk to owners. This is the only way to get a true, unfiltered perspective. You can try to contact folks from that Disclosure Document or cold outreach, but the best way is a warm intro of some kind. See who is in your network and if anyone can connect you. Talk to as many as possible, from different regions and backgrounds.- Avoid getting your information from the franchisor itself. The person with "Franchise Development" in their title is usually a commissioned salesperson. They are not going to give you the most honest information, or point you to anyone other than people that are deep in the cult. It's a good idea to talk to successful and unsuccessful franchisees, but make sure you can do it with as little of a filter as possible.SummaryThis got long. I think I'll stop it here, as that covers most of it.tl;dr - know what a franchise is (hard work, just like any small business), and what it isn't (passive income), Make sure to pick the right franchise brand that is going to support you, cares about your profitability, and will allow you to grow. Do a lot of research - like an obsessive amount - because you don't want to buy-in, and then uncover a complete shit show that you could have spotted before you invested your savings and life in a business.Stay fresh out there (but don't Eat Fresh)! Cheers. see hubwealthy.com/wealthy
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