Wednesday, March 29, 2023

How to Evaluate a Startup Franchise Company

How to Evaluate a Startup Franchise Company

A lack of franchise history can make validating the performance of a startup franchise program very difficult. If you’re considering a startup franchise, engage a qualified accountant and franchise attorney to assist in the evaluations.

Evaluate The Performance of The Business Used to Design the Franchise

Because a startup franchise is new, there is usually limited franchisee history that can be used to evaluate the Franchise for Sale Melbourne quality. This means that added focus must be placed upon the business that served as the model or launching pad for the new franchise. Obtaining as much financial information as possible regarding that business is critical. Use your accountant and franchise attorney to assist in your evaluation. Obtain a detailed evaluation of the business. Know what the sales and earnings have been. If the franchisor refuses to disclose information, then walk away.

Detailed Scrutiny of The Franchise Program

How will add a royalty and other fees to the franchisee’s income statement impact the projected bottom line? This is another reason to have financial information about the business. Tie in basic terms of the franchise agreement such as territory, royalty and fees to the operation of the original business. Will the franchisee operate in a much smaller territory than the original business? Add the royalty and other fees onto the income statement of the business as a way to determine how a franchisee’s income statement could look.

Market Analysis and Competitive Review

Does the franchisor have a detailed market analysis? There should be data that will demonstrate a market for the franchise products or services. If you and your advisors need to rely upon lots of talks and little substance, you could be headed for trouble. You’ll also need some information regarding the competition. Some competition can be a positive sign, whereas no competitors could mean there is limited demand in the market.

Franchise Capitalization

The franchisor is required to provide financial information in the Franchise Disclosure Document. Your accountant needs to review this information to confirm that the franchisor has sufficient capital to operate and grow the franchise. Too little capital can lead to aggressive franchise selling to obtain franchise fees. Some registration States require new franchisors to provide a guarantee and escrow of initial franchise fees so that the franchisees receive the agreed-upon services. Limited capitalization could prevent the franchisor from providing services and support to new franchisees.

Franchisor Experience and Staff

When business owner starts a franchise program, they go from running one business to two. In addition, the founder may have limited franchise experience. Since most startup franchisors will have limited staff, it’s important to appraise franchisor staff thoroughly. Someone at the franchisor level with franchise experience will be a plus. You and your advisors will need to gauge the business competency and capability of the founder. At the startup phase of a new franchise quality of staff is more important than the quantity.

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