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Questions to Ask Before Buying a Red-Hot Franchise

Monday, 23 Jul 2012 | 9:29 AM ET
JGI | Jamie Grill | Blend Images | Getty Images

When you're researching franchise opportunities, sometimes the warning signs are obvious: shrinking systems, high turnover rates, unhappy franchisees. But it's not always so cut and dried. Sometimes what looks like a green light at first glance might actually be a red light — or at least a yellow “slow down and ask more questions” light.

Take growth, for instance. Growth is important to franchising; there's no doubt about that. That's why year-to-year growth is one of the biggest factors considered in Entrepreneur's annual Franchise 500 ranking. If companies didn't want to grow, they wouldn't franchise in the first place. But is growth — especially rapid growth -- always a good thing?

It's easy to assume that fast growth means a franchise system is strong and will only get stronger. And this can certainly be the case. But many new franchises grow quickly, only to then have their numbers plummet a few years down the line. So when looking at a fast-growing franchise, it's important to stop and examine why the company is growing so quickly and how prepared they are for that growth.

Here are a few questions you should ask:

1. How careful is the franchisor in choosing its franchisees?

If you're talking to a franchisor, they should be interviewing you as much as you're interviewing them. They should want to find out if you're a good fit for their brand and ready and willing to follow their system. If instead they seem willing to offer a franchise to anyone who'll write them a check, that could be why they're growing so quickly -- and it could also be a big warning sign. The bigger a franchise grows, the more brand awareness it gains, but this can be a double-edged sword. All it takes is one bad franchisee to make the whole system look bad. As advisor Joel Libava of Franchise Selection Specialists Inc. puts it, “New franchisees can either make or break a franchise concept,” so don't be tempted by franchisors whose growth depends on not vetting their franchisees.

2. How experienced is the management team?

“A top-notch experienced management team can do wonders,” says Libava, “especially if they’ve experienced fast-growth in other franchises they worked with. They know what to do when there are all of a sudden 12 new franchisees arriving for training.” When looking at a fast-growing franchise (or any franchise for that matter), find out if the management team has any previous experience in franchising — and if so, with what companies. Don't be afraid to dig into their backgrounds and ask how they've handled rapid growth in the past and what plans they have in place to deal with it now.

3. What resources does the franchisor have in place — and what resources is it willing to add-- to handle growth?

Franchisors must have both the technology and the personnel in place to be able to support a growing number of franchisees. And they must be willing to increase their personnel as needed. Says Libava, “Franchisors that get stingy and start asking their staff to wear too many hats will soon have a burned-out staff.”

4. Does the franchisor offer exclusive territories?

Ask the franchisor if they offer exclusive territories, and if so, how big they are. If they don't offer exclusive territories or if the territories are relatively small, consider whether the type of business they're selling would benefit or be harmed by having many locations in the same area. Can you work together with other franchisees or company-owned locations, or will you only be in competition? If a system is growing with no consideration for whether its franchisees can be successful in large numbers, take a step back.

On the surface, rapid growth looks like a positive, but it could be a hidden warning sign instead. It's your job when researching a fast-growing franchise to dig below the surface to find out which it is. Talk to the franchisor — ask them the tough questions. Talk to franchisees — both current and, if they exist, former. Examine the company's Franchise Disclosure Document (including audited financial statements,) and enlist the help of an attorney and an accountant.

Bottom line: Do your homework. The most important growth to you is that of your individual franchise business, and that depends on getting into the right franchise system, one that will take care of its franchisees no matter how many of them there are.

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