Franchise Investors Need Clear Decision Making Criteria They Never Depart From

Some call this "Black and White" Thinking

At the end of 2024, Berkshire Hathaway held $334 billion in cash or cash equivalents because they couldn’t find investments that met their rigid criteria. This mentality is why their continue to provide outsize returns over the long run to their investors. You need this same mentality to provide outsized returns to yourself in any business.

That is why when it comes to a framework for finding the right franchise, there can be no gray. You should have specific criteria and if the franchise violates three of those criteria, you immediately stop looking. Going into the franchise search with this mentality will prevent you from making bad decisions as emotions start to creep in. You need simple, black and white thinking to make good decisions.

How to Define Your Franchise Criteria

Clearly outline both quantitative (numbers-based) and qualitative (personal preference-based) criteria.

Quantitative Examples:

• How much you are you willing to invest?

• How many employees do you want?

• Does the average franchisee hit your target for net profit?

• The industry must be at least $25 million in size in my territory with average annual growth of at least 4%

• Average net profit margins need to be at least 20% for an owner operator and 15% when a staff is in place so I don’t have to be there at all to manage the location.

Qualitative Examples:

• If an employee gets sick and I have to step in, would I be ok doing this job?

• Do I like the franchisor staff?

• What kind of employee do I want?

• My business is open 9-5

• No major lawsuits

Categorizing Your Criteria

Divide your criteria into two tiers:

• Tier 1 Criteria: Non-negotiable. If a franchise misses even one of these, immediately stop researching it.

• Tier 2 Criteria: Important, but slightly flexible. If a franchise misses three or more of these, stop considering it.

Why This Matters

Committing to your framework from the beginning is crucial. Ask someone important to hold you accountable. After months of research, emotional excitement, and financial investment in legal and accounting fees, discovering a late-stage red flag can be painful. Without a firm checklist, you might overlook serious issues, leading to costly regrets.

Bottom line: Define your rules clearly, stick strictly to them, and embrace a disciplined approach to choosing a franchise. Imagine you are a decision making robot with no deviations based on emotions. It either is a good investment or it isn’t.