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What You Should Ask Before Buying a Franchise

Written by: Sebastien Page

Article Overview: Buying a franchise means putting big dollars on the line, and, for better or for worse, your success doesn't entirely depend on you – the quality of the company behind your franchise also matters.

What You Should Ask Before Buying a Franchise

Buying a franchise means putting big dollars on the line, and, for better or for worse, your success doesn't entirely depend on you – the quality of the company behind your franchise also matters. It is therefore important to learn as much as you can about the parent company before you make an investment.

Consider asking the following ten questions:

1) Is it a “package franchise” or a “product franchise”? The majority of franchises are “package franchises” – businesses such as fast-food restaurants, muffler shops or motels that come complete with a laid-out business model covering everything from financial controls to hiring guidelines. “Product franchises,” on the other hand, include businesses such as car dealerships and gas stations that exist primarily to distribute the parent company's goods. Understandably, product franchise owners have more control over how they run their businesses than package franchise owners.

2) Does the business lend itself to the franchise model? For example: fast-food businesses greatly benefit from their associations with the brand name and products of the franchisor. Don't take it for granted that this holds true for another kind of business, such as, for example, a car wash.

3) Take a look at the offering circular: What does it say? According to the Federal Trade Commission, franchisors are required to provide prospective franchisees with an offering circular that contains basic facts about the company. Be sure to read the UFOC document; it contains invaluable information about the firm's legal history, business experience and other franchisees.

4) What is the number of franchisees in the organization? The more franchisees there are, the more successful and established the business is. Be aware, however, that if a firm's other franchises are located near yours, you could end up competing with a nearly identical business.

5) What's the franchise fee? According to the International Franchise Association, 95 percent of franchise fees were less than $40,000 as of 1996. However, you could end up paying more for a franchise affiliated with a blue-chip national chain.

6) How much will you end up paying in royalties? Generally, franchisors charge royalties equal to 3-6 percent of each franchise's revenues. However, some firms charge much more, and still others charge flat fees on an ongoing basis.

7) How much money will your business bring in? Usually, the parent company's projections are optimistic. Franchisees may have different opinions, however – the UFOC will tell you how to get in contact with them.

8) Are these people you can work with? Franchising is a long-haul kind of commitment, and quite expensive, too – so you'd better get along with your bosses. Visit the company's home office, regardless of how far from you it is, and ask other franchisees about their experiences with the parent company.

9) How is the franchisor going to help you? A franchisor may negotiate a lease, select a site for your business, advertise for / interview prospective employees, finance the franchisee fee or equipment costs, get business licenses, or provide other services. What will your franchisor do for you? Get it in writing.

10) How legitimate is the franchise company? Occasionally, franchisors will try to bilk new entrepreneurs. Look to other franchisees, the FTC, and the Better Business Bureau to determine just how legitimate your franchise company is.

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  Buying A Franchise
  Franchising with all its Success
  Reselling Your Franchise
  Things to Watch Out for When Buying a Franchise
  Why Use a Franchise Consultant?

Article Tags: business experience, business model, buying a franchise, car dealerships, car wash, fast food restaurants, federal trade commission, food businesses, franchise fee, franchise fees, franchise owners, franchisor, franchisors, history business, international franchise association, legal history, muffler shops, offering circular, parent company, prospective franchisees



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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