Ten questions to ask yourself before you buy a franchise

march22_2016
22
March
2016
Considering a Franchise

What are the 10 questions to ask yourself before you buy a franchise?

Do You Know the Franchisor?

You need to know a potential franchisor on a deeper level than just as a nice person with a winning smile and a great golf swing.  In addition, you need to know if the opportunity is as solid as the glossy brochure represents.

Most franchisors want to make a good impression on you.  Their brochures are glossy and slick.  And their selling process is well developed and executed.  However, although a franchisor may appear solid, you will know the truth only when you ask around.  Rely on your research.  When in doubt, walk away from the opportunity.  There are plenty more to choose from.

Can Your Hobby Turn Into Your Business?
Turning a hobby into a business is possible, but where do you begin?  First look inside yourself and determine what makes the hobby so enjoyable.   Is it the solitude of doing something for yourself?  Is it the fact that you are under no pressure to share the results of your efforts with anyone else?   Do you like to work at a slow pace and make sure that every detail is perfect?  Do you enjoy the fact that you have developed a new way of doing things?

Personal Inventory – Are You Ready To Be On Your Own?
If your calling card is self-reliance, congratulations.  Having that quality means you’re used to taking care of yourself and doing what needs to be done.  Some of the most successful franchisees have an enthusiasm and a commitment to making their businesses the best in the system.

Make a slow and detailed evaluation of the opportunity and whether the opportunity will allow you to meet your financial goals.

Reviewing your financial situation isn’t the most exciting part of investing in a franchise – but it must be the cornerstone of the process.

Do You Understand The Terms Of The Contract?
Franchising is a relationship between a franchisor and franchisee that is governed by a written agreement – the contract.  In the process of investigating a franchisor, you meet franchise executives and franchise salespeople who will make you promises.  Remember  though, the franchisor’s obligations and promises to you, and your obligations and promises to the franchisor – the obligations that are legally binding – will be found in the written agreement you sign.

Understand what you are signing.  Unless you are an experienced franchise attorney, consultant, or someone who has been actively involved in franchising, you need to have an attorney to help you understand the contract.  Even if you are experienced, having a qualified franchise attorney work with you is always a smart idea.

Franchising is complex business and legal relationship.  The attorney you hire needs to be qualified and experienced in franchise law.  The business advisors you consult need to understand the franchise relations and, ideally, the industry your franchisor operates in.

Read the agreement yourself first and make a list of questions and concerns.   Look at the promises made during your discussions with the franchisor and make sure they are covered in the agreement you’re being asked to sign.  Discuss your concerns with the franchisor.
If you are satisfied that all your concerns have been answered work with your attorney in finalizing the agreement.

Are The Other Franchisees Happy With Their Investments?
If you are investing in a franchise in Canada, the franchisor will provide you with a disclosure document.  In that document, you will find a list of franchisees in the system and a list of those who recently left the system.  Getting to know the franchisees is the single most important part of your research.

Does The Franchisor Have A History Of Litigation?
How would you feel about buying into a company that has a history of lawsuits with its franchisees?  While having lawsuits is not always an indication of a bad franchisor, it’s something that should concern you and something you need to investigate.

Can You Make Money With This Franchise?
Guess what?  Profit isn’t a dirty word.  That’s why we’re in business.  You want to know whether you can make enough to live on and put some aside for a rainy day.  You want to make certain that the money you invest in the franchise can make a return as good as other opportunities you may have – including simply putting the money in the bank.

While it’s not likely the franchisees will share their profit and loss statements with you, it doesn’t hurt to ask them about their profitability.  If they are willing, they can give you information that will help you develop your own projected financial information for your location.

The type of information to look for is:

Size of location
Number of staff hours required per week
Type of labour required – you want to determine how much it will cost you to get the same quality labour in your market
Amount and types of local advertising required

You get the idea.  The dollar amounts may not be as useful as other information that you can build your financial model on.  What good is knowing that the franchisee is paying $50,000 a year for labour, for example, when qualified labour in his market is available at minimum wage and you will need to pay $10 an hour?  What you need to know is the number of staff necessary and their qualifications.  Work with your accountant to determine what information will help you develop your own financial projections.

Is The Franchisor Making Money, And Where Is the Money Coming From?
You will be relying on the franchisor to provide the promised services and to keep the concept fresh.  You want a franchisor that is financially solid – not just today, but for the long term.  A franchisor that has financial problems is not a franchise system you want to get involved in – unless you like added risk.

New franchisors may receive the majority of their income from the initial fees they charge the franchisees.  That’s normal.

Franchisors that have been around a while, however, should be supporting their systems from continuing revenue – such as the royalties paid by the franchisees.  (Royalties are the continuing fees paid by the franchisee to the franchisor for the use of the trademarks and the system.)  If royalty income is not able to pay for the support services, what will happen to the franchise network if expansion slows down or stops?

Building a franchise organization by relying on up-front fees paid by the franchisees is building a house of cards.  Occasionally, franchisors that have underlying financial problems will try to cover them by selling territories to countries internationally.  The large up-front payments they receive from international franchisees can make the franchisor appear profitable.  However, the fee is received only one time – the cost of providing services to the franchisee may eat up most of the fee – and the underlying problems, while camouflaged, are still there.

Be sure that your franchisor is on firm financial ground and able to provide support over the long term.  Have your accountant review the franchisor’s financial statements.

Does The Franchisor Understand Franchising?
It’s not enough for a franchisor to be able to work the grill or change a muffler.  That’s your job, the job of the other franchisees, and the job of the managers of the company-owned operations.

Operating and expanding a franchise system, as well as providing support to franchisees, requires different skills than simply running single or multiple locations.