Buying a franchise may be a good way to start a business if you don’t want to start from scratch. But it isn’t always. Here are some facts to help you decide if buying a franchise is the right choice for you.
Are you considering buying a franchise? If you want to own your own business, buying a franchise seems like an easy way to get up and running. Acquiring a franchise would eliminate the time and risk involved with developing your own products, branding, and operating methods.
Yes, you have to pay for that convenience, and you know that even as a franchise owner, success won’t happen overnight. And you’re ok with that.
But still, you’re on the fence. Is buying a franchise a good idea? Is it a good idea for you? Which franchise should you purchase? Will it make much money? Is this the best way for you to start a business?
Because buying a franchise is such major financial decision, you need to thoroughly assess not only the specific franchise opportunity you think you want to buy, but also your own finances and suitability for operating a business as a franchisee. Here are some of the questions you need to answer in order to make a well-informed decision.
What are the advantages and disadvantages of buying a franchise?
It’s important to know both the pros and the cons of buying a franchise. If you buy a well-established franchise, the benefits you derive include starting a business with a recognized brand name, fully developed products and services, an established system of doing business, and training. If you buy into a new franchise concept with few other franchisees, there will probably be fewer benefits – particularly if the brand name isn’t widely recognized.
Among the disadvantages of buying a franchise are that you must run the business the way the franchisor dictates, you will usually have to pay ongoing royalties on sales, and you will be locked into a contract to run the business for the length of time specified in your agreement.
1. Am I a rule-follower or innovator?
When you buy a franchise you don’t just buy a business idea. You buy a specific way of doing business. As a franchisee, you will have rules you must follow governing what you sell, how you sell it, what your location looks like, and many other things. If you aren’t the type of person who is content doing things by the book, then franchising probably isn’t for you.
2. What products or services would you enjoy selling?
What industries are you familiar with? What kind of work do you like to do, or dislike doing? If you don’t like dealing with paperwork, government regulations, frequently hiring people (and doing background checks), opening a home healthcare franchise would be a bad idea for you, even if there is a need for it in your area. Similarly, if you don’t know much about taxes and accounting, a franchise that offers those services wouldn’t be right for you either. Remember that if your contract won’t let you sell your franchise, or you can’t find a buyer, you’re stuck with it for the term of the contract, even if you don’t like running the business and it’s unprofitable.
3. How much money do you have available to invest in the business?
The amount of money you have available to invest in a franchise is an important factor. If you’ve only got $30,000 and the total franchise investment for a specific opportunity is $90,000, the opportunity isn’t going to be right for you, no matter how much you like the company.
RELATED: Tips for Buying a Home-Based Franchise
4. How much does it cost to buy a franchise?
The franchise fee won’t be your only expense. Find out what you can expect to pay for advertising, training, inventory, insurance, and all other costs in addition to the franchise fee and ongoing royalties. Add to that the amount of money you’ll need to live on while the business is becoming established (typically 6 months to a year.)
5. How well established is the franchise brand?
How long has the franchise been in existence? Have they been in business for many years or are they brand-new? How many other franchises have they opened and where are they located? While there can be some advantages for becoming one of a franchisor’s first franchisees, there’s also a significant risk with an untested brand and a company that doesn’t have a well-established track record in franchising.
6. How stable is the franchise?
How long was the business running and profitable before it decided to franchise? Where are the products known? What is the background of its officers? (Any history of litigation or bankruptcy of the franchise or its officers should be included in the Franchise Disclosure Document.)
7. What kind of track record does the franchise have?
Are most of their franchisees satisfied and happy? Names and addresses of franchisees in your state should be provided before you sign any contract. Call the people on the list and ask about their experiences. Consider searching online for the name of the franchise you are considering buying followed by the words “franchisees” and “sue” or “lawsuit.”
8. How much money can you expect to make owning the franchise?
The best way to get information about the profitability of individual franchises is to reach out to franchisees and ask them how they’re doing. That’s because franchisors can only legally provide information about the financial performance of their franchisees if they include that information in article 19 of the Franchise Disclosure Document (FDD). Any information included there must be documented and verifiable, and it is the only financial performance information that can be provided. Many franchisors, for various reasons, don’t provide this information in the FDD.
9. What training is available?
Ask what training and support will be provided as part of your franchise fee. Will you get step-by-step instructions and hands-on training? What kinds of manuals and other materials will you get?
10. How close to your location can the franchisor let another franchisee set up shop?
What kind of territorial rights will the franchise grant you in your agreement? You need to understand what area your territory covers, and how the franchisor defines a territory in their agreements. Will you have exclusivity in your territory? In other words, will they guarantee that you will have the sole rights to sell their brand in a specific area?
11. How big is the market for the franchise’s products or services in your area and how much competition is there now?
Even if your franchise grants you exclusivity in your area, your business could be negatively impacted if a competing franchise opened across the street or somewhere else in town. If you buy a Subway franchise, and someone opens a Firehouse Subs location nearby, your business could be impacted. For that matter, a deli, a bagel store, or even a Tropical Smoothee location could cut into your business, since they all will be trying to attract people at lunchtime, for instance.
12. Will you be required to purchase supplies, products, or services from the parent company?
If so, compare your cost to the local retail prices of the same goods. There have been instances where the price from the franchise company for goods was higher than the price of the same goods in local retail stores or local discount warehouses. Selling anything under such conditions would be quite difficult. Similarly, if you’re required to use services provided by the franchisor, your costs might be higher than you’d pay other providers.
13. How long does the franchise agreement last?
When you buy a franchise, you don’t own it forever. What you are doing is licensing the rights to use the franchisor’s brand name, logo, and business methods for a specific number of years. At the end of that time, you may be able to renew the franchise agreement or choose to walk away.
14. What do the contract terms say about ownership? Can you sell out to someone else if you wish?
If you want to continue when the contract expires, will it be automatically renewed? Will you be able to convert your store into an independent operation if you should want to?
15. How will disputes be handled should they arise?
Watch for clauses requiring arbitration in the franchisor’s home state if it is different than yours. Should a dispute arise, you’d have to travel to that state for arbitration hearings.
16. What criteria does the franchise use in selecting franchisees?
Do they do any screening? Or, do they seem more interested in getting your franchise fee?
17. Does the franchise salesperson or the broker you’re working with use high-pressure sales techniques to get you to sign on the dotted line?
If so, be wary. Don’t get pressured by someone telling you that you’ll lose out on the opportunity if you don’t act right away. You need to take the time to do due diligence on your potential investment and make a carefully researched decision about the suitability of the franchise for your needs.
Keep Records of Your Research
There are many factors to consider in deciding whether or not to buy a franchise. As you pursue the list of questions above, you’re likely to develop many more, too. Keep track of them and the answers by writing them down. Then review all the data you collect before making your decision.