Outside Consultant: What Are Some Things to Consider Before Becoming a Franchisee?

This "Outside Consultant" column by Dennis Monroe, senior distinguished fellow at the University of St. Thomas School of Law, ran in the Star Tribune on Oct. 25, 2021.

Just like past downturns in the economy, the pandemic has created a new flood of entrepreneurialism. The desire to be the master of one’s own destiny has led to an increase in franchise sales. If you decide to take the leap, here are some things to consider:  

  1. Know yourself. Are you looking to replace your job? Then you might want to look for an opportunity as an owner-operator, where you would be actively involved in the day-to-day running of the business. If you want a more passive investment, look for franchises, such as restaurants, where you hire others to do the actual work, and your role is oversight and investment. Franchises are, for the most part, full-time endeavors; however, systems such as home-based or van-based businesses can be worked part time. 
  1. Do your due diligence. Look for a profitable concept which will provide a reasonable return on your investment.   
  1. Read. Don’t skim the Franchise Disclosure Document (FDD) provided by the franchisor to ensure they will provide appropriate support. FDDs state what the franchisor will do for you, what your requirements are, and, in most cases, the unit economics. Because these are legal documents prepared by lawyers, it can be tricky to understand some of these disclosures, so contact other franchisees in the system to find out if they are making money, and if they are satisfied with the franchisor and its support.   
  1. Have adequate funding. The FDD will state the capital requirements needed for a particular franchise, but you should have a cushion for start-up costs. You don’t want to run out of money before you start making any.    
  1. Talk. Finding the right franchise involves both talking to your friends and business colleagues and searching the internet for concepts that fit your skill set and/or services that are missing in your area. There are numerous franchise sales organizations (most of which have names that start with “fran”) that will serve as “matchmakers.” But be aware that their job is to sell franchises that are, in some cases, their clients.   

The value of franchising is buying into a model with a proven track record, and while you won’t have complete control of your destiny, you are the boss.  

Dennis Monroe is a senior distinguished fellow at the University of St. Thomas School of Law, and co-founder and chairman of Monroe Moxness Berg PA.