What Questions To Ask When Buying A Franchise – There has never been a hotter time to buy a franchise. Franchises have become steadily more profitable over the past eight years.
The apparent opportunity has prompted exciting headlines such as “24 Top 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 When Buying A Franchise
But are they really worth your time, energy and money? Yes. But only for people who can analyze the deal and their own financial situation. Entrepreneurs looking to open a franchise this year should ask themselves the following questions before considering any deal.
New To Franchising? Questions You Need To Ask Now!
There are important differences between a conventional startup and a franchise. Both ventures make you a business owner. Both let you choose your own financial destiny. But that’s where the similarities end.
Most people think of franchises as fast food joints, but there are five types of franchises. By far the most popular (and one we will discuss here) is the business format franchise.
…and so, so much more. A single franchise location or operation is called a “unit.” Interestingly, many unit owners take multiple units. The SCORE Association reports that more than half of the franchise units today belong to the owner of more than one unit.
According to the International Franchise Association (IFA), a franchise 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’ n paying a royalty and often an initial fee for the right to do business under the franchisor’s name and system.”
How To Evaluate A Franchise Business
The Small Business Administration (SBA) makes the concept simpler with a handy visual (below) that shows the main features of a franchise. It is a proven system that is widely available, offers no promise 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 an employee of the franchise for 4 years, it was a smooth transition to owner when my employer decided to retire,” recalls Sandy Zamalis, BCCS, who purchased LearningRx in Staunton, Virginia.
Entrepreneurs who properly evaluate a franchise deal are one step ahead of those who trust the franchisor’s vague promises.
You should also look for strong overall company growth. Entrepreneur ranks the fastest growing franchises each year, giving you an idea of where franchisees have the best opportunities for success. Additionally, try to dig out individual unit sales. You can find some of this valuable information from the franchisor’s franchise disclosure document (FDD), Item 19, specifically. Or, you could search sites like FranchiseChatter.com, where analysts aggregate and collect relevant financial information from one source (and add their commentary). And if you’re itching to get back to in-person events, check out the nearest Great American Franchise Expo date and location.
How To Review A Franchise Disclosure Document For Financial Performance
And finally, if at all possible, try to find the success rates of other units. This can be seen in Item 20 of the FDD of franchisees who have published their contracts. If it’s not disclosed, search online for loan default rates or news stories that might give you insight. For example, Senator Catherine Cortez Masto recently sent a letter to the SBA regarding the low success rates of four traders. If you cannot find this information online, contact the SBA directly.
Determine whether you have enough capital—or access to it—to start or buy a franchise.
Each industry and business model will entail completely different start-up costs. For example, a virtual tutoring franchise will not have the expensive price tag of the real estate (real estate) associated with a restaurant franchise.
What types of start-up costs can you expect? Good question. Franchise Direct has a constantly 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:
Questions To Ask Before Buying A Franchise (and Before Selling One)
The US Chamber of Commerce offers startup costs for 10 popular franchises to give you an idea of units that 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 looking 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 self-identified serial entrepreneur Tom Scarda. “It was a success. I sold it within five years and semi-retired at 41.”
Questions To Ask Before Buying A Franchise With Your Spouse
“My second franchise was a complete failure and I lost almost all my life savings. I should have spoken to my previous adviser. She would have straightened me out and saved me a lot of time and a ton of money.”
There are two main reasons why you need expert help. The first is because the legal agreement, known as a franchise disclosure document (FDD), is not just a contract – it is 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 observe.
But the most exciting way a franchise attorney can help you is by giving you negotiating power. Franchise lawyer (and Legal Eagle 2020) Farheen Ibrahim says,
“Some of the most common points we discuss are in financial terms (such as a lower initial franchise fee, waiving royalties for a period of time, reallocating marketing funds to local advertising for an initial period), limiting the personal guarantee, and more guarantee. protected territory. Sometimes, we are even able to negotiate more favorable non-compete termination provisions and liquidated damages.”
Franchise New Zealand
The other reason you need an outside expert’s perspective is to help navigate the financial complexities of the deal and operations. Thankfully, Ignite Spot is ready to help. From bookkeeping and payroll administration to tax preparation, cash flow analyses, and even CFO services, your outsourced accounting team can help and advise you on all the 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 savvy outside counsel. Now, do you have – within you – what it takes to own and operate a franchise?
First, you must understand your own tendencies. “Know your strengths and weaknesses,” says Amanda Singer, franchisee, 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’s stellar with people.”
Vital Questions To Ask Before Franchising Your Company
You also need to stick to his mindset. Lianne Sanders says your operation will suffer if you get bored. That’s what happened to their mango smoothie franchise. “It was a drinks business, and it did quite well for a few years but a loss of interest prevented me from continuing the operations.”
And finally, you need some business acumen. “You can’t get by 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 previous voices, Fuller also emphasizes hiring or outsourcing for your weaknesses. “You have to have some marketing and sales background, along with programming. Or, be prepared to hire those things out. “
Many entrepreneurs (some you’ve heard from here) get sucked into franchise “opportunities” by predatory franchisors – instead of analyzing the business model for themselves.
More Questions To Ask Before Buying A Franchise Business Escape Artist
You are one step ahead. You now 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 chat about the franchise you are considering.
How to Start a Bookkeeping Business 5 PPP Loan Application Frustrations and How to Navigate Them Pros and Cons of Starting a Business in 2021 Due diligence is essential before signing the franchise contract to manage your expectations and avoid wasting money, time and effort. Given the significant financial and multi-year time commitments you’ll be making with a new business, you want to take advantage of the opportunity with as much information as possible.
Asking smart questions about the franchise opportunity is one of the most important steps in this due diligence process. While it is important to go through the company’s marketing materials and franchise information, the information provided will be inherently positive. For example, one common mistake of franchise holders is to assume that a franchise system has several units, a solid product, and attractive stores, the opportunity must be profitable. In reality, this is not always the case.
These are the four categories of questions, I recommend uncovering the truth about the franchise you are investing in. Use these questions to help you decide on the franchise that best fits your goals and skill set.
What Questions Should You Ask When You’re Considering Buying A Franchise?
Many people don’t ask questions about franchises before signing on the dotted line and end up regretting it after a few months. Don’t let this happen to you. This is the quintessential franchise