Should You Buy a Franchise?

Potential franchise buyers typically have two things in common: they’ve always wanted to own a business, and they don’t know where to start. It’s important to begin by evaluating the business as well as your own objectives, skills, resources and limitations. Prospective franchise buyers should apply the same level of thorough research and reflection they would for any entrepreneurial venture. 

1. Budget and Risk:  You need to consider both the initial investment, what it will take to purchase and open the business, and the total expected investment. Understand the risk involved. Decide how much of your own money you want to invest and how much you could obtain from other sources.
 
2. Longevity of the Company:  How long has the parent company has been in business, and how important is longevity to you? Some people like the excitement of a startup and launching a new idea, while some prefer an established company with many successful franchises.
 
3. Number of Franchises:  How many franchise units have been sold and opened. A company on an aggressive growth track could oversell franchise licenses and have a backlog of unopened stores. This could be a risky situation for a newcomer. Review the financials and look for royalties and franchise fees, which should be reported separately. A report showing 90 percent of fees from franchise fees indicates a company that has granted many licenses and might be trying to catch up. A more balanced percentage indicates a company that is earning money more evenly from both opened and unopened franchises. A balanced company has more time and resources for newcomers.
 
4. Processes in Place:  Does the company have an established and refined discovery process? Is there a process for engaging with potential franchise buyers? Do they allow the potential buyers to fully understand what they’re getting into regarding corporate culture, economic standing and long-term vision?
 
5. Suitable for Family:  One key question to ask yourself, and the parent company, is whether you would place a family member in the business. This is a good test to identify your level of comfort.
 
6. Access to Existing Franchisees:  The parent company must disclose the names and contact information for current and past franchise owners in its Franchise Disclosure Document (FDD), and it’s important to talk with them. (The FDD is a legal document, and in the state of California it must be audited and approved.) Here are some questions to ask:
• What was the first year like?
• What was a typical day like or a typical week?
• Are you now achieving your goals and what you set out to do?
• Would you do it again?
• Why did you exit the business? (For past owners.)
 
7. Time Onsite:  Spend some time working with or in the franchised business. This is the best way to really understand whether this is something you want to commit to by contract.
 
8. Competition:  Understand the competitors in the market segment. Is it a crowded market? Does the company differentiate from the competition? Does the franchise market to clients or customers in a way that is comfortable to you?
 
9. Exit:  Understand the parameters of the contract and the terms of engagement. Is there an option to exit if it didn’t work out? What ownership of inventory and resources are you liable for in the event of a shut down or exit? Is selling an option?
 
10. Reflect:  Using all the information you have collected along the way during this discovery process, take time to ask yourself whether this is something you really want to do. Consider your objectives and ambitions, your financial situation and resources and your limitations. You need to be honest with yourself about what you are getting into and the impact it will have on your life.

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Rick Morgin is a Consultant with The Franchise Consulting Company and alumnus of Santa Clara University. The Franchise Consulting Company assists clients with the educational process of researching and selecting available franchise businesses that best suit desired lifestyles and financial goals. The research, qualification, and application services provided are free; fees are paid by the Franchise company when a client opens their business. Rick is a guest blogger for MOBI. For more information please email rick@thefranchiseconsultingcompany.com or visit https://thefranchiseconsultingcompany.com        

For more information about buying a business or franchise please visit MOBI’s Starting a Business course Session 9, “Buying a Business or Franchise.”