Buying a franchise business is a great business opportunity for anyone who wants to own a business without building one from scratch. The benefits of a franchise are very appealing, but owning and running a franchise is hard work. Before you invest your hard-earned money into a franchise, here are a few things you should do first.
Give yourself a personality test
While investing in a franchise allows you to own your business, you’ll still operate within a highly regulated system. You’ll be expected to adhere to certain standards and practices, which means that you won’t have a lot of creative freedom when running your business. Therefore, if you are getting out of employment with the hopes of running your own show, then you might not be cut out to be a franchisee.
Study the field
Before you sign up to buy a franchise, ensure that you learn everything there is to know about franchising. There are many useful online resources that can help you understand how this business model works. A good example is the International Franchising Association’s Franchising 101 guide.
Choose your industry and franchisor
Deciding on a franchise industry to invest in shouldn’t be too hard. Choosing an industry because you think it will make you rich fast rarely works, so it is best that you select one that you have experience in or are passionate about. Picking a franchise company to invest in, on the other hand, can be a little tricky. Here are a few things to consider when selecting a franchise.
- Consumer demand for the franchisor’s product and services: Ensure that there is a strong demand for the franchisor’s product in your marketplace and look at how the product compares to the competition.
- Methods of distribution: A good franchise company should use franchising as its primary method of distribution. Be wary of franchisors with numerous company-owned franchises and companies that distribute their products through channels such as supermarkets.
- Sales and earnings data: Ask potential franchisors to provide you with their earnings projections and evidence of actual performance. Go through the data and only consider companies that demonstrate an attractive return on your investment.
- A well-established trade name: Well-established brands have a larger market share, and this often translates to increased sales and larger profits.
- Good franchisee relationship: Having a good relationship with your franchisor is crucial to the success of your business. In addition, franchisees should have a strong franchisee organisation to pave the way forward for a cooperative franchising system.
- Strong marketing plans: A well-designed market system should always include substantial franchisee training and ongoing support.
Dig for dirt
Before investing in any franchise, it is important that you do a little investigation of your own to unearth any secrets that they may be hiding. Take advantage of sites like Unhappy Franchisee and Blue Mau Mau to search for negatives about a franchise you are considering. Also, ensure that you go through their litigation history. Cases against third parties such as suppliers should be noted, but also pay close attention to cases against a franchise system’s own franchisees.
Read the entire the Financial Disclosure Document
The FDD is a very long and intimidating document, but it is a gold mine of information. Reading this document in its entirety is crucial to your research, but they are a few sections that are most important for you to understand. They include:
- The territory: Knowing your territory is one of the most important things that you should understand before signing a franchise agreement. It is crucial that your franchisor defines your territory for you, and if possible, they should grant you territory exclusivity. The size of your territory varies depending on your setting, and it is defined by either population or distance.
- Renewal rights: The number of renewal rights you are entitled to and the length of renewal periods after the initial ownership term ends are the most important contract terms you should get right to avoid problems in the future.
- Restricted covenants: This section covers what you are allowed to do or not do during ownership and after ownership ends. It describes how much involvement you’ll have in running your franchise on a daily basis and restrictions on competing business interests.
- Ownership transfer rights: Many franchise agreements include the right of first refusal, which allows the franchisor to take back ownership of its unit instead of the franchisee selling it to a third party. Try to eliminate this provision and restate that any sale to the franchisor should be at fair market value and not the depreciated value.
- Estimated initial investment: The estimated initial investment and ongoing fees paid are important considerations when buying a franchise. While these costs are always included in the franchise agreement, they are often understated. For instance, the stated initial cost should factor in construction costs, lease security costs for a location, equipment lease costs, and even money to cover the first few months of operations. Franchisors often underestimate the cost of construction so much that there is a significant difference between the cost stated in the FDD and actual costs leading to legal disputes.