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.