Buying a Franchise



In your quest for new business opportunities, buying a franchise may just be the way to go

It allows you to benefit from an already established brand and reduces the trial and error involved in starting your own business from scratch.

Statistics show that the chances of success in buying a franchise operation are generally recognized as much greater than those of operating a business from scratch or even buying an existing business.

Successful franchise systems have a proven brand, concept and history of success, as well as ongoing support and training. Buying a franchise and becoming a franchisee within a proven franchise system, removes many of the pitfalls and mistakes encountered by independent start-ups. Nonetheless, it is essential to practice due diligence when considering buying a franchise to ensure the franchise concept and system are solid and one should always remember that the risk of failure exists in buying any business whether a franchise or a local business venture.

Buying the right franchise reduces risks

Is franchising still a safe bet even during market turmoils? The answer is yes.

Buying a franchise system offers safeguards that an independent business cannot provide. That's not to say all franchisors are perfect, or that a poor businessperson can get by just because they have the support of a brand name. What it does mean is that the franchisees can exploit the reputation of a successful name and business system, lowering their risk, particularly during an economic climate in which the consequences of failure are high.

Success in franchising, however, is based on mutual dependence. If a franchise is unsuccessful, the franchisor, as well as the franchisee who fails, will suffer. Not only does the franchise unit fail to produce an ongoing revenue stream for the franchisor, but it can also take up a tremendous amount of the franchisor's time and and effort to either salvage or resell the franchise. Reputable franchsors go to great lengths to select an appropriate franchisee.

By planning ahead and thoroughly researching every aspect of the business system you are considering, the risk when buying a franchise is lowered.

The economy never truly settles down, accordingly so, successful franchisees perfect their skills continuously to navigate the highs and lows. If the economy is still a concern for you, try speaking with some current franchisees in the system you are hoping to be part of. Franchisees who have gone through at least one economic cycle (seven to ten years) should be able to tell you how the business performs over time.

You should approach the matter rationally when buying a franchise - how do you match up with a particular franchisor?

Key considerations for finding the right match

If a franchised business interests you, consider how compatible you are with its system, product/service and guiding philosophy.

Buying an affordable franchise allows you to avoid heavy debt from the outset.

Know the franchisors history. Read disclosure documents thoroughly. Knowledge is power so be prepared and know what questions to ask franchisors when investigating a franchise system.

Consider whether the franchise brand is a good fit with your market. Work closely with marketers and business consultants to develop marketing plans and demographic studies. Evaluate the product or service and the franchisor's prices. Judge the competition. Know your supplier options. Is the franchisor willing to listen to your input about your market area?

Location is obviously key to franchise success and the value should not be ignored. Seek a franchisor who is prepared to help you choose a site or assist you in finding one, help with construction or renovations of your location, and recommend contractors and tradespeople.

Most franchisors recognize that treating franchisees well benefits all concerned. Due diligence should allow you to avoid a predatory franchisor and buy into a good system. Usually, most business disputes can easily be resolved. A good franchisor will use clearly worded, standardized contract terms to keep disputes straightforward, predictable and, hopefully, short. You should pay close enough attention to the dispute resolution terms of your franchise agreement. The means to solve most problems will be right there in black and white.

ARE YOU READY TO BE A FRANCHISEE

When considering buying a franchise, due diligence and self-knowledge are the keys to an informed decision.

Research and investigate the franchise business you are considering buying

Becoming a franchisee is a big decision to make, and it’s one that you have to invest time in if you’re going to do it right. When considering buying a franchise, it is essential that you properly research and investigate the franchise business that you are considering.

You should get professional advice before you execute or lock into any agreements. You need to understand what you’re signing, and more importantly, whether you’re signing with the right franchisor.

Remember, franchisees fail – but many franchisees could have avoided failure if, in the beginning, they would have conducted a more thorough research of the franchise selection process before buying a franchise.

You must put in the time, get the information, assess it, reassess it, and then make an informed decision.

If buying a franchise is a possibility for you, how do you find one to buy

The best strategy for picking a successful franchise is to learn everything possible about the franchise. Conduct a diligent and thorough investigation on the franchise company. Consult a franchise expert, your lawyer and accountant.

The Critical Factors

  • Determine how long the franchise company has been in business
  • How many locations does it have and how many have failed?
  • Learn about its owners and directors and assess the public profile of the operation
  • Ask about lawsuits
  • Does the franchisor have adequate financial backing or is it relying on the sale of franchises to develop the system?
  • Examine the franchisor's financial disclosure with your accountant
  • Study available operating plans
  • Be comfortable with the franchisor's business style
  • Consider whether the company is sufficiently liquid to meet the operating requirements of its franchisees
  • Check out it's credit rating
  • Confirm you will receive adequate marketing support. Tour the franchisor's offices to see if the staff and facilities are sufficient to provide this support
  • Determine if their costs are passed to you over and above the franchisor's fee
  • Make sure you will receive appropriate training for yourself and your staff and whether the cost is included in the initial franchising fee
  • Determine whether financial assistance is available from the franchisor and its extent
  • Will there be adequate support if you do not achieve your projections or incur financial losses?


Just as the franchisor will be assessing you, you should be assessing the overall franchise

The framework of a solid franchise system is comprised of seven key elements: franchisee selection, training, communications, marketing, problem-solving, rewards and corporate culture. To help assess the viability of the concept, ask the franchisor questions designed to determine whether the framework that supports a franchise concept is in place.

You are probably investing a good deal of your future in the franchisor, so do not hesitate to ask a lot of questions.

A franchisor should have no hesitation in providing the necessary information to a qualified franchise prospect and should respect the fact you are investigating the franchise system.

In order to get a complete picture of the franchises you’re investigating, you should take advantage of every resource you can find.

There are several directories, magazines, and other sources including websites that list franchise opportunities by industry and by investment amount required. They also provide information and resources to help you make the right decision. In addition many cities host franchise trade shows where you can go and talk to the franchisors directly. For more details, click on this link.

Franchisor’s evaluation of a potential franchisee

You should always keep in mind that the franchisor’s goal is to expand its business by alluring potential franchisees to its business opportunity. Be cautious if the franchisor fails to investigate you as thoroughly as you investigate the franchisor.

When you express interest in becoming a franchisee, the franchisor should spend time initially getting to know you, develop an understanding of your background, and evaluate you as a potential business owner/operator. If the franchisor doesn’t make this time investment in evaluating you and your situation, yet claims you possess all of the personality traits, skills, and know-how to be successful, look for another franchisee opportunity. One thing for sure, if the franchisor is merely interested in your money and does not evaluate you under certain standard criteria geared to determine your potential to succeed, clearly there is something wrong with the franchisor.

Self-Evaluation: Is Franchising For You?

Before you even see a franchisor, evaluate yourself. Define who you are and whether you are the type of person who should invest in a franchise. Make sure the franchise you have in mind interest you, will help meet your career and financial goals and that you have an interest in and aptitude for the work.

Consider if you are cut out to be a franchise owner and operator by taking a hard look at yourself and evaluate how you would handle the responsibilities and operations of a franchise.

Part of the decision to become a franchisee is about you – your lifestyle, family, likes and dislikes, work habits, values, ethics and your dream of economic independence. Only you can tell whether becoming a franchisee is right for you.

Self-assessment for buying a franchise

Some key questions you should ask yourself before buying a franchise are:

Will your franchise be taking a considerable amount of your time away from your family? If so, how do you feel about that?

Is your family enthused about the franchise? Will you enjoy working with them if they will be employees?

Do you enjoy working with others?

Do you have the background or character traits necessary to succeed in owning a business?

Do you have the necessary capital resources? Can you make the financial sacrifices?

Are you emotionally prepared for working long, hard hours?

Based on your answers, you should then be able to feel confident and excited about the prospect of becoming a franchisee.

If there are areas that are causing alarm or making it difficult to move forward from a psychological or emotional standpoint, seek out the necessary guidance from friends, family, your accountant, an attorney, a financial planner, or an independent business advisor (with franchise expertise) before moving forward.

What are some of the drawbacks of owning a franchise?

In exchange for the security, training, and marketing power of the franchise trademark, you must be able and willing to give up some of your independence. If you are a person who likes to make most decisions on your own or to chart the course of your business alone, buying a franchise may not be right for you. As a franchise owner, you must comply with the various controls and procedures established by the franchisor. Then, too, all successful businesses require a lot of dedication and plain, hard work. You must be prepared to make that commitment.

What kind of investment is necessary when it comes down to buying a franchise?

Investment requirements differ tremendously. It all depends on the industry and the type of business. Total start-up costs can range from $20,000 or less, to over $1,000,000, depending on the franchise selected, and whether it is necessary to own or lease real estate to operate the business. Moreover, the initial franchise fee for most franchisors is between $10,000 and $30,000. Seventy percent of franchisors charge an initial fee of $40,000 or less. The average investment, excluding real estate costs, is between $350,000 and $400,000. You must discuss the initial fees and opening costs with individual companies, although the International Franchise Association’s (IFA) Franchise Opportunities Guide can supply general information.

INVESTIGATE BEFORE INVESTING

There is a lot to think about before making the commitment to buying a franchise and becoming a franchisee

The International Franchise Association's (IFA) pamphlet, "Investigate Before Investing," is a must-read for potential franchisees. Among the points which IFA recommends for investigation are:
  • the type of experience required in the franchised business
  • a complete understanding of the business
  • the hours and personal commitment necessary to run the business
  • who the franchisor is, what its track record has been, and the business experience of its officers and directors
  • how other franchisees in the same system are doing
  • how much its going to cost to get into the franchise
  • how much you're going to pay for the continuing right to operate the business
  • if there are any products or services you must buy from the franchisor and how and by whom they are supplied
  • the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years
  • the financial condition of the franchisor and its system
Both the Federal Trade Commission and the International Franchise Association (IFA) have many helpful publications and resources.



Realizing your dreams

Many people dream of being an entrepreneur. By purchasing a franchise, you often can sell goods and services that have instant name recognition and can obtain training and ongoing support to help you succeed.

But be cautious. Like any investment, buying a franchise is not a guarantee of success.

Make no mistake: running a franchise is a lot of hard work and when you make the choice to buy a franchise, you're embarking on a long journey requiring serious commitment; however, with proper preparation, a thorough understanding of the franchise industry and its demands, and a strong desire to succeed, the rewards can be grand and you too can be amongst the thousands of franchisees who have realized their dreams.

A Caveat About Buying A Franchise

Since spending your savings on a business is one of the most important decisions of your life, if not the most important decision, always heed the classic advice, “Buyer beware.”

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