Avoid investing your hard-earned money into an inevitably failing franchise. Knowing what to do before buying a franchise will help you make better-informed decisions when putting your money on the line.
immpreneur.com gathered the following information on 5 things you should do before making any decisions about buying a franchise.
1. Assess Your Buying Power
You should look past the purchase cost of a franchise. This cost is typically listed as the franchise fee and equipment cost. Franchises can involve steep marketing costs and the need to “make it” on break-even books for quite some time or struggle with a period of net losses before your business gains traction. Even when franchising a well-known brand like Wendy’s, customers will take time to discover and begin frequenting your new location.
The Franchise Disclosure Document (FDD), which franchisors are obliged to make available to potential franchisees, is required to list additional working capital. But in the FDD, you’ll find that most franchisors only calculate three months of expenses. It makes more sense to calculate your potential expenses for a minimum of six months. Even with everything going well, it may take you up to a year to begin turning a profit. It would be prudent to have access to capital that covers both business expenses (six months) and personal expenses (for 1 year).
Note: A franchise disclosure document is a legal document that is presented to prospective franchise buyers in the pre-sale disclosure process in the United States. Initially, this document was known as the Uniform Franchise Offering Circular prior to the Federal Trade Commission revising it in July 2007.
2. Communicate with Other Franchisees
FDDs list the names and phone numbers of current franchisees. Take the time to talk to at least 10 of them. Ask about:
- The pros, cons, and hidden costs they encountered
- What did they learn in the business that they didn’t from their research
- How long did it take them to turn a profit
- How much did they budget for their business, and how much did they actually spend
- What were the difficulties in building the business
- How supportive are the corporate offices
- How challenging is it to find and hire good staff
Note: Ask the current franchisee – “If, given what they know now, would they do it again or recommend the franchise opportunity to someone else?”
3. Go to Work at a Franchise
This is the most effective way to see how a franchised business works from the inside and whether your work ethics fit the company’s culture. Most companies favor franchise applicants who worked their way up from entry-level positions. It is highly recommended to spend a minimum of six months as an employee before becoming a franchisee.
4. Study Franchising and The Company You Want to Franchise from
There are various franchise businesses and models that require different amounts of funding. You can endeavor a restaurant franchise, fitness franchise, or even a manufacturing franchise. Many franchisees must spend a designated amount on advertising expenses and you have no control over how that money is spent.
For more helpful information on selecting a franchise, visit: franchise.org and aafd.org. Seek publicly available information on the intricacies of franchising, and here is a good start: ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
5. Consider Hiring a Lawyer and an Accountant
If you feel comfortable reading a balance sheet and you’ve insured a past business, or negotiated legal contracts, you may not need the help of an accountant, insurance agent, and lawyer. It is, however, in your best interest to hire a lawyer and other professionals to review your financial health and how it will be affected by the proposed franchise arrangement before you sign any franchise contract. An accountant can help you determine whether or not the proposed numbers add up.
Crucial Considerations to Make Before Buying a Franchise
Before making an investment in any franchise, there are some primary points of interest that should be weighed and taken into consideration. These include:
- How other franchisees in the same structure are doing
- How much it will ultimately cost to buy into the franchise
- How you will pay for the continuing right to operate the business
- Are there any products or services you must buy from the franchisor
- The financial condition and record of the franchisor
- The type of professional experience required in the franchised business
- The hours and personal commitment/investment needed to operate the business
- The franchisor’s history and professional experience of its officers, directors, and managers
Tip: Seek crystal clear clarification on the terms and conditions by which the franchise relationship can be terminated or extended and how many franchisees have left the system in the past few years.
Note: No federal or state law prohibits an immigrant (regardless of immigration status) from starting their own business. However, employing a person without a legal working status is against the law.
Buying a Franchise
In this article, you discovered 5 crucial things to do and several considerations to make before deciding to invest in purchasing a franchise.
Doing your research about a franchisor and their structure will give you the proper insight to make a fully informed decision about signing on or not.
Failing to thoroughly vet a franchise opportunity will expose you to financial and legal troubles that can take years to resolve.