Prospective franchise owners have a lot of homework to do when evaluating whether a franchise is worth investing in — and whether they have what it takes to be a franchisee. This due diligence can take several months and may not even result in the investment in a franchise, but there are certain traits that aspiring franchisees must have.
As a franchise broker, Matt Sullivan literally represents 1,000 different franchisors, including Pet Supplies and Verlo Mattress, and helps them find worthy franchisees. The would-be franchisees he spends 99% of time with aren’t necessarily frustrated members of the executive suite. They come from a variety of backgrounds and most don’t have previous experience as a business operator. Some are simply curious and want to learn more about franchising, but Sullivan puts them through a type of screening process to determine whether they should even buy a franchise.
There’s a lot of education about the pros and cons of owning a franchise, the role of a franchisee, the capital requirements, and the value that can be provided by the franchisor who is selling the franchise territory. This necessarily includes an assessment about the prospective franchisee, including a personality assessment about their propensity to own a franchise.
“The process is very long and that’s by design,” Sullivan states. “Generally, it takes about three months to work through the process. If someone wants to go through it faster, that’s feasible if they’re actively engaged in that process. Sometimes, I’m working with candidates for over a year before they buy. Sometimes, it can go down to two months at the fastest. And so, if someone doesn’t have the time, energy, or effort to sustain that interest, we know they’re really not interested in owning a business.”
Still, the interest in franchising has been increasing at an impressive rate. Perhaps the pandemic shutdown and essential business classifications have influenced this, but according to the U.S. Census Bureau, the number of franchise establishments grew from just under 500,000 in 2017 to 805,500 in 2023, a jump of 61.7%. Franchises are dominated by food businesses such as fast food and sit-down restaurants and coffee shops, service-related fields such as home repair and cleaning services, and business support services such as accounting and printing services.
For advice on purchasing a franchise, we spoke to Sullivan, a Cottage Grove native who is the CEO of RightFran LLC, a franchise consulting company, and a franchisee for Express Employment Professionals, an international employment services firm; attorney James Law, a shareholder with the Reinhart Boerner Van Deuren law firm; Tim Lightner, franchisee of both Two Men and a Truck and the complementary Two Men and a Junk Truck; and Stacey Riechers, a local franchisee of Express Employment Professionals.
They offer a number of tips for people on the hunt for the right franchise.
Tip 1: Face full disclosure
The first thing Law asks prospective franchise owners, especially if they have targeted a particular franchise, is does the company have an FDD, a financial disclosure document that also includes a franchise agreement between franchisor and franchisee? There are a number of things in the document that are required disclosures — 23 different standard items.
According to Law, the important pieces are from an investment standpoint. What’s the initial fee (franchise fee) that’s going to be required just to have a franchise contract? It’s not uncommon to see franchise fees as high as $80,000, although many are in the $50,000 range. “And that’s apart from other investments that you have to make, and leases and build outs — the standard things that you would probably associate with opening up a franchise business,” Law explains. “So, there will usually be some type of initial fee. How much is that fee? And then, ongoing fees and payments.”
The FDD also covers territorial rights. Is it an exclusive territory, which protects a franchisee from competition from a similar franchise in that territory or different businesses that might be open by the franchisor, or is it a nonexclusive territory? Needless to say, an exclusive territory is preferable “so you have some assurance that the franchisor is not going to be opening up another similar store two blocks away to give you a competition,” Law notes. “That’s important to look at. What are the territory boundaries? What are the rights to the territory?”
Another aspect of the FDD is the length of the franchise agreement because if somebody is making a substantial investment of money and time and effort, the franchise contract must be for a certain number of years. What are the renewal rates when the contract expires? What kind of termination rights and standards does the franchisor have? Are there any restrictions on termination? For example, does the franchisor need to have good cause — usually defined in the agreement as criminal behavior or fraud — for termination?
“Can the franchisor make substantial changes to the franchise agreement when there is a renewal, or during the term that might change the economics of operating the franchise? Those are things that are important to look at to see what kind of rights the franchisor has to make changes, to terminate, and whether they decide to renew with you because those are important protections for the franchisee who’s making the investment.”
If an issue arises and there is a contract dispute between the parties, does the agreement require mandatory arbitration? Where is that mandatory arbitration going to be? It’s not uncommon to have the arbitration take place where the franchisor is headquartered, which might be in Texas or California. That could become onerous because for people who are thinking about having a franchise in Wisconsin, the state has a fair dealership law that offers protections for franchisees.
“A lot of states have different kinds of laws regulating franchises and franchise relationships. The contracts for franchisor, they’re usually skewed heavily in favor and benefit of the franchisor, not the franchisee,” Law says. “Dealer laws are meant to try to correct the balance of the of negotiation to give some protection to franchisees (dealers) against certain types of terminations without good cause or without notice.
“If there’s an arbitration in Texas or California, there will be arguments about whether the Wisconsin fair dealer law applies, and the arbitrator that you have there may not be very familiar with the law and what its provisions are.”
According to Law, there are royalties to be paid by franchisees to franchisors on an ongoing basis. There will be ongoing royalties for sales and sometimes the royalties are based on gross receipts, or they might be based on net receipts. In addition, that royalty amount might be a fixed amount or variable.
Sometimes, the royalty is just based on different kinds of sales because it really depends on the franchise and what the business says, Law notes. “But the royalties, that’s money that if it’s gross, for example, that means that all the money that’s coming in the door — say it’s a 7% royalty — that’s going to go to the franchisor, and then you’ve got all of your other expenses for the normal operating expenses and you’re going to get down to what your net leftover is, or what your net profit is.
“Depending on the amount of the royalties due, are you going to be able to make enough money to generate enough revenue that even with the royalties, you’re still going to be making some type of profit?”
Recalling the original contract he signed with Two Men and a Truck more than 30 years ago, Lightner says he was advised against it. “I remember reading that very first agreement and our attorney looking at me and saying, ‘I can’t really endorse you signing this because the home office has total control of everything,’” Lighter says. “That’s a very scary thing and also a very scary relationship to enter into.”
Yet, at the time, Lightner had a connection through family that enabled him to have a level of trust to step into that arrangement. His original franchisor, and one of the two original Two Men, was his former brother-in-law who recruited Lightner’s wife and, by extension, Tim himself. “We were both very young and looking back, we didn’t really know what we didn’t know,” he says, chuckling at how it unfolded. “That was probably beneficial to jump in.”
Riechers also had a degree of familiarity with her franchisor, having started in the staffing industry. She now has two franchise territories, and her basic advice is to go into franchising agreements with your eyes wide open. “You know, the terms are what they are,” she states. “When you agree to go into business with a franchise, they give you their contract and you sign it.
“Now, I actually have two franchises with Express Employment, so I signed my first franchise back in 2009. Every five years, we have an amendment or something that might change, but they’re usually just minor changes.”
In 2022, when she opened her second unit, “I had a lawyer go over the franchise agreement just to make sure that I was all up on what to expect from them, and what they should expect from me,” she says. “I don’t know if onerous is the right word for the agreement. It’s just very black and white.”
Tip 2: Mind the model
Franchisors have a certain way they want a franchisee to run the business. Many have got successful models and since they expect franchisees to follow it to be consistent across the board, there’s some training involved. This is another aspect of franchising that is spelled out in the FDD. Is there required training? Who’s paying for the cost of that training — is it you, the franchisee, or is the franchisor providing any training at their cost? How periodic is the training? Do you have to travel? “Some of those training requirements could be pretty expensive, and those costs can add up very, very quickly,” Law says.
The FDD includes important information about what that program is and whether the franchisor could make changes to those best-standard models that might require you to make additional investments, or changes in the look and feel of the store that you’re running. Those could become additional, unplanned costs.
Another justification for either termination or nonrenewal could be that you’re not following that program the way that you’re supposed to and you have to come into compliance. “If you don’t come into compliance with the program and how the business is supposed to be run, according to the standards of the franchisor, then that can become a cause for termination or nonrenewal,” Law explains. “Or you might have sales requirements. Say you have to meet a certain volume of sales and if you don’t meet those sales requirements, that could become another reason for termination or nonrenewal.
“So, each one of those provisions for a termination, every single one has to be scrutinized so that you can carefully see the impact because any time that you’re making an investment, you want to have some kind of assurance about meeting those requirements so that you’re not going to get terminated or not renewed.”
Following a successful model, however, is one of the great incentives and attractions for wanting to own a franchise. Franchisees don’t have to reinvent the wheel. According to Lightner and Riechers, it helped to know the franchisor had an established model to follow, one that had been successful for others.
“It absolutely did,” Lightner says, “and that is the key to franchising in and of itself, is that we had, before we even opened our doors, six or seven contacts with other Two Men and a Truck franchisees who were operating, who were successful, and who were profitable. We could reach out to them for information, and that is a really powerful thing, especially when you’re getting off the ground and it feels like 1,000 things are coming at you once.”
Riechers notes that she has some operational flexibility as long as she stays within the brand guidelines, but the goal is to unify the brand as much as possible. Marketing is one example, as she contributes to a national ad fund for the purpose of unifying its brand throughout the U.S. “Our training is top-notch, and that is one area that I always am very grateful for Express,” she says. “The system already exists. It’s just up to me to implement it and implement it consistently.”
The key trait for a franchisee, according to Sullivan, is they must value the idea of producing results for others. “I know that’s a bit vague, but in a business, you can’t just do it because it feels good,” he states. “You have to be in business because you’re solving a problem or producing value for others. If you don’t have that mindset, you’re disqualified. You should not buy a [franchise] business.”
Tip 3: Favor franchisor support
Just in case you get the impression that the FDD is one sided, part and parcel to the document is the requirements or obligations of the franchisor to support the franchisee in areas such as marketing. This is another area where fees could apply — franchisees might have to contribute a certain percentage of their revenue to a marketing budget, and the franchisor is required to spend a certain amount in your location, area, or state.
“Or they may have the obligation for training — does that franchisor have an obligation to support you with training, marketing, and a host of other things with the running of the business?” Law notes. “And so, that becomes something that’s really important. It’s not just what are the obligations of the franchisee, but the franchisor.”
Not only do good franchisors encourage franchisees to lean on one another, they actively support their franchisees. That’s especially true in the early stages of a franchise, which is what Lightner’s junk removal company is going through now. “In the beginning, we’re seeing this with the junk removal. The home office doesn’t quite have that system sorted out yet, and they’re working on it in conjunction with the early franchisees. Oftentimes, there may be incentives, rebates for royalties, or incentives for equipment — those sorts of things to help offset the expense that comes with trying to figure this thing out.
“With the junk business, we’ve been saying things like, ‘We’re building this bike while we’re riding it, but the bike was in the box when we got it,’” Lightner adds. “But once you have that system up and going, then a good franchise system will start to really grow and that home office will start to provide support and coaching on all levels of your business. And you can get a pretty good handle on the franchise system that you’re talking to, if it’s a quality franchise system, by asking the franchisees. They’ll be happy to tell you, believe me.”
Often, people will come to Sullivan with a particular franchise in mind, and one of the traits he looks for in prospective franchisees is whether their interest lies in a franchise they would be proud to be associated with. For Riechers, owning a franchise in the employment services area aligned perfectly with her professional passion.
Riechers, who began with Express Employment as a development representative, where she assisted franchisees, touts the opportunities to partner in growth. Among the ways she took advantage of her franchisor’s assistance include participation in all the training programs offered; the ability to speak up, ask for help, and utilize her corporate developer; network with other franchisees at Express Employment; and volunteer to be involved with focus groups at Express.
It all contributes to a franchisee who was attracted to this franchise because the work itself involves helping people find gainful employment. “It’s still my favorite thing to do — put people to work,” she states. “I’m a natural salesperson. I have always been the sales arm of Express Employment, along with my general manager and sales manager, but there is nothing like actually getting somebody a job or opening a door and giving them the opportunity to be successful.”
Tip 4: Savor smooth successions
Another thing that could be attractive for a successful, long-term franchisee is that it’s easier to reap the benefits of the business when it comes time for succession, especially if the decision is to sell rather than have a family member or trusted colleague take over. In this case, selling the franchise to another franchisee in the same franchise system is often a legitimate — and easier to attain — option.
In addition to the Madison market, Lightner has acquired Two Men and a Truck territories in Milwaukee, Racine, and Waukesha, and he founded one in Fond du Lac with a partner owner in that market. In his estimation, there is a healthy market of buying and selling within the franchising systems. When it comes time to retire, this built-in market is a real benefit because there are other franchisees who want to buy your business or be purchased, and that’s where some creativity creeps in.
“That’s been a fascinating part of this to me, and that is to see how creative you can be on developing franchising,” Lightner states. “I’m doing that through our management company right now that oversees and runs each of these locations, and that’s where the creativity comes in — how to build all that.”
The point isn’t lost on Riechers, who purchased her Express Employment franchise for eastern Dane County in 2009 and two years ago opened her second location in Dodge County, which covers Dodge, Jefferson, Columbia, Marquette, and Green Lake counties. “That was a brand new franchise,” she notes, “so that was the new challenge for me to actually start a territory from scratch.”
According to Sullivan, there’s another reason that franchises represent a smoother path to succession. Not only do you have the brand name, but the perspective buyer is buying the systems of the franchisor, which appeals to bankers, Sullivan notes. “Ask any type of business banker, would you like to underwrite a guy with an idea that’s going to try to create a business? That’s really risky as compared to would you like to underwrite or loan to a franchisee of a large franchisor that’s well established for multiple decades and has hundreds and thousands of locations?
“Really, the only risk there is the execution of the business model,” he adds. “There’s a tremendous value of buying and building a franchise business as compared to the startup guy with an idea type of scenario.”
Highly recommended
Lightner believes franchising gets a bad rap as a business model because it’s not really about corporate behemoths reaping all the benefits from their brand. Based on his experience, he would recommend franchising to others, with a caveat. “I say yes with an asterisk, and I’ll always qualify it, and I qualify it on this: If you’re looking to get into business for yourself and you want to be creative and you want to figure out solutions to the business and not necessarily take a proven system and implement it, then you’re not going to ever be happy in franchising because franchising is very much about executing and not creating.”
Operators can get creative in the way that they execute, he reiterated, but they are not going to create new logos and new processes and new systems. “My whole mission in life right now is helping others get into business, and I can’t think of a better way [than franchising] for people with little to no experience in business, or even without a college degree, to still find a path toward the American dream.”
Riechers’ experience as a developer for Express Employment helped her make the decision to purchase a franchise in 2009. “I knew I believed 100% in what I was buying. For two years, I got to see Express do what they said they would do.”
