In Part 1 of this series, you read about the 5 questions that can help you decide if you’re the right fit for a franchise business. Now it’s time to discover what questions you must consider about the franchisor before signing on the dotted line.
- Are the other franchisees happy with their investments?
If you’re investing in a franchise in Canada, the franchisor must provide you with a disclosure document. This document includes a list of franchisees in the system and those who recently left the system. Getting to know the franchisees—and their experience with the franchise—is the most important part of your research because it helps you figure out if you should pursue the opportunity.
- Does the franchisor have a history of litigation?
How would you feel about buying into a company with a history of franchisee lawsuits? While lawsuits are not always an indication of a bad franchisor, it’s a red flag to investigate.
- Can you make money with this franchise?
Guess what? Profit isn’t a dirty word—it’s essential for staying in business. Before investing in a franchise, you’ll want to know if you can make enough money to support your lifestyle and savings goals. Will investing in the franchise give you a better return than other opportunities, including simply keeping money in the bank?
While it’s not likely the other franchisees will share their profit and loss statements with you, due diligence means asking about profitability, including when they achieved their first profitable year. This information helps you and your accountant develop financial projections for your potential location.
Information you need for financial planning includes:
- Location size
- Number of staff hours required per week
- Types of labour required (to figure out the cost of the same quality labour in your market)
- Amount and types of local advertising required
The total dollar amount isn’t the most useful information because knowing a franchisee pays $50,000 a year for labour doesn’t provide the complete picture. If qualified labour goes for $15 per hour in one market, but the same labour costs $21 per hour in your market, you’ll have very different calculations!
- Is the franchisor making money and where does the money come from?
It’s wise to invest in a franchisor that is financially solid—not just today, but for the long term. Run away from a franchisor with financial problems! Knowing how franchisors make money in general helps you identify any red flags in the opportunity you’re exploring.
New franchisors may receive most of their income from initial franchisee fees—that’s normal.
But established franchisors should support their systems from continuing revenue such as royalties and ongoing marketing fees. Royalties are ongoing fees the franchisee pays the franchisor for the right to use the trademarks and business system. This model means sustainability—otherwise a franchise would be in trouble if expansion slows down or stops.
A franchise organization that relies on up-front fees to stay in business is a house of cards. Occasionally, franchisors with financial problems sell territories internationally; the large up-front payments can make the franchisor appear profitable, but this is a short-term solution camouflaging underlying financial problems.
Have your accountant review the franchisor’s financial statements so you can be sure your franchisor is on firm financial ground and not hiding anything.
- Does the franchisor understand franchising?
If your franchisor knows how to work in the franchise, that’s good, but it’s not enough. Your franchisor must know how to own, operate, support, and expand a franchise system. How long has your franchisor been in the business? What does success look like? If you’re a first-time franchisee, it’s wise to avoid inexperienced and un-proven franchisors. It’s just not worth the risk.
Now that you know the 10 biggest questions to ask before buying a franchise, the next step is answering them! If you’re interested in the Hand & Stone franchise, you can find some answers in our article about the Hand & Stone culture.
Take control of your lifestyle with a solid business system.
Hand & Stone is the most relaxing massage and facial franchise investment opportunity in Canada. Our proven business model allows franchise owners to profit from the booming health and wellness market and meet consumer demand for luxurious yet affordable spa services. Find out more about becoming a Hand & Stone franchisee by reading our blog or connecting with us directly.