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What Questions To Ask Before Buying A Franchise – There’s never been a hotter time to buy a franchise. Franchises have become steadily more profitable over the past eight years.
The apparent opportunity prompted exciting headlines like “24 Top-Rated, Affordable Franchises You Can Buy for $25,000 or Less – These Low-Cost Franchises Are Worth Your Time, Energy, and Investment.”
What Questions To Ask Before Buying A Franchise
But are they really worth your time, energy and money? Yes they do. But only to people who can analyze both the transaction and their financial situation. Entrepreneurs who want to open a franchise this year should ask themselves the following questions before considering any deal.
Introduction To Business Bus 101 Starting A Business
There are important differences between a conventional startup and a franchise. Both ventures make you a business owner. Both allow you to choose your financial destiny. But that’s about where the similarities end.
Most people think of franchises as fast food, but there are five types of franchises. By far, the most popular (and one we’ll discuss here) is the business format franchise.
…and yes, so much more. One franchised location or operation is called a “unit”. Interestingly, many unit owners take on multiple units. The SCORE Association reports that more than half of today’s franchise units are owned by owners of more than one unit.
According to the International Franchise Association (IFA), franchising is “…a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and business system, and a franchisee, who pays a royalty often an initial fee for the right to do business under the name and system of the franchisee”.
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The Small Business Administration (SBA) makes the concept simpler with a helpful visual (below) that demonstrates the main features of the franchise. It is a proven system that is widely available, offers no guarantee of profit (even if you invest a lot in it), provides a high level of support, tends to attract investors and more.
You can launch a unit, or you can buy an existing franchise the same way you can buy any other small business. Many franchisees buy their units from their employers. “As a franchise employee for 4 years, it was a smooth transition to ownership when my employer decided to retire,” recalls Sandy Zamalis, BCCS, who bought LearningRx in Staunton, Virginia.
Entrepreneurs who properly evaluate a franchise deal are a step ahead of those who simply trust vague promises from a franchisee.
You should also look for strong overall company growth. Entrepreneur lists the fastest growing franchisees each year, giving you an idea of where franchisees have the best chances for success. Additionally, try to dig into individual unit sales. You can find some of this valuable information from the Franchisor’s Franchise Disclosure Document (FDD), Item 19, specifically. Alternatively, you can search sites like FranchiseChatter.com, where analysts scan and compile relevant financial information from the same source (and add their own commentary). And if you feel like getting back to in-person events, look for the nearest Great American Franchise Show date and location.
Find Out What Is The Franchise Fee
And finally, if at all possible, try to find the success rates of other units. This is found in item 20 of the FDD of franchisees who have published their contracts. If not disclosed, search the Internet for loan default rates or news articles that may give you insight. For example, Senator Catherine Cortez Masto recently sent a headline letter to the SBA about the low success rates of four franchisees. If you cannot find this information online, contact the SBA directly.
Determine if you have enough capital—or access to it—to start or buy a franchise.
Each industry and business model will involve vastly different operating costs. For example, a virtual classes franchise will not have the expensive price tag of the real estate (real estate) involved in a restaurant franchise.
What types of operating costs can you expect? Good question. Direct Franchises has an always updated list of initial investments and ongoing costs for many franchises. For example, the initial investment for a budget blinds operation might look like this:
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The U.S. Chamber of Commerce offers operating costs for 10 popular franchises to give you an idea of which units might be similar to the one you’re considering.
In addition to the initial start-up costs, entrepreneurs who want to open a franchise are often required to provide proof that they have a minimum liquid cash reserve.
While money helps, entrepreneurs who want to open a franchise need more than cash to get started. You will need legal and financial expertise.
An outside expert or two can evaluate the deal and the impact of your choices. “My first franchise was Maui Wowi Smoothies,” says serial entrepreneur Tom Scarda. “It was a success. I sold it within five years and semi-retired at the age of 41.”
The Complete Guide To Buying A Franchise
“My second franchise was a complete failure and I lost almost all my life savings. I should have talked to my previous consultant. She would have straightened me out and saved me a lot of time and a lot of money.”
There are two main reasons why you need the help of an expert. The first is because the legal agreement, called a Franchise Disclosure Document (FDD), isn’t just a contract—it’s a series of contracts. A franchise attorney in your corner is the only way to understand and navigate them all. Furthermore, your state has its own franchise laws that you must know and follow.
But the most exciting way a franchise attorney can help you is to give you negotiating power. Franchise attorney (and 2020 Legal Eagle) Farhin Ibrahim says,
“Some of the most common points we negotiate are financial terms (such as a lower initial franchise fee, a waiver of royalties for a certain period, reallocation of marketing funds to local advertising for some initial period), the limitation of the personal guarantee, and a larger supplement. Protected territory. Sometimes , we are even able to conduct more favorable negotiations after the termination of non-competition conditions and cancellation of compensations.”
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The other reason you need an outside expert’s perspective is to help navigate the financial complexities of the agreement and operations. Fortunately, Ignite Spot is ready to help. From bookkeeping and payroll to tax preparation, cash flow analysis and even CFO services, your outsourced accounting team can help and advise you on all financial aspects of buying and running a successful franchise.
Let’s say you have all the information, you have a strong financial position and you have smart outside counsel. Now, do you have – within you – what it takes to own and operate a franchise?
First, you must understand your tendencies. “Know your strengths and weaknesses,” says franchisee Amanda Singer, owner of Just Love Coffee.
“Find people who have strengths in your areas of weakness and let them own it. If you’re not a people person, hire a manager who understands people.”
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You also need adherence to it. Leanne Sanders says if you’re bored, your surgery will suffer. That’s what happened to her mango smoothie franchise. “It was a liquor business, and quite successful for some years, but my loss of interest prevented me from continuing in business.”
And finally, you need some business sense. “You can’t do it with passion alone,” says franchisee Angie Fuller, owner of Farrell’s eXtreme Bodyshaping in Cedar Falls, Iowa. “You have to know how to run a business.”
But to echo the previous voices, Fuller also emphasizes hiring or outsourcing your weaknesses. “You need to have a marketing and sales background, in addition to programming. Or, be willing to rent these things.”
Many entrepreneurs (some of whom you have heard from here) are attracted to franchisor “opportunities” by predatory franchisors – instead of analyzing the business model themselves.
Questions To Ask Yourself Before Buying A Franchise
You step forward. Now you know how franchising works and what to expect. You also know who to turn to for help: Ignite Spot, your expert outsourced accounting team. Call us today for a free 30 minute conversation about the franchise you are considering.
How to set up an accounting business 5 PPP loan application frustrations and how to navigate them 3 questions to ask your finance manager service provider if you are considering selling your business This checklist was written for people who are considering purchasing a franchise and contains questions that are both important and relevant to ask before making any final decision.
To be successful in franchise investing, you don’t necessarily need to be an industry subject matter expert, but you do need to know what questions to ask when doing your due diligence. This checklist covers the essential areas you should focus on as you consider investing in a franchise.
The questions cover general concerns, quality and experience of the franchise owner, you as a franchisee and finances involved in this type of investment. With this checklist, you’ll be well equipped to research franchise investment opportunities to help you make an informed decision.
Franchise Search, Top Questions Before Signing A Franchisee Agreement
Top questions How experienced is the franchise owner? How much training and help will the franchisee provide? What is the product you are going to sell?
In general, what makes this franchise special and unique compared to other franchise alternatives? What makes you love this franchise over other franchises? if you were playing devil
