What to Ask Before Buying a Franchise
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If you’re considering buying your own franchise, you probably have a million questions running around in your mind; questions that can make a difference in the success or failure of your business goals. To give you control during the decisionmaking process, here is a checklist of 20 questions that I share with clients before they make the leap into franchising:
- How long has the company been in existence before it started franchising? Was it specifically set up to franchise?
- What is the company’s financial position? You should check accounts for at least the past three years. Can you get trade or bank references?
- Can the franchiser show you any figures or net profits of one or more of its existing franchisees, and can you personally check the figures with the franchisees themselves?
- What are the criteria to be selected as a franchisee?
- As a franchisee, what are your obligations? Are there any operational restrictions on pricing or use of suppliers?
- What is the nature and extent of the rights that will be granted to you?
- How many franchised units are currently in operation? Are there also company-owned units in operation?
- Does the agreement have a termination clause; if yes, what will it cost you? Can you sell your franchise?
- Does the franchiser have a reputation for honesty and fair dealing among its franchisees?
- What kind of assistance will the franchiser provide? Will it involve management and employee-training programs, advertising campaigns, credit and merchandising ideas?
- Does your region have a law regulating the sale of franchises, and has the franchisor complied with that law?
- How much equity capital will you need upfront to purchase the franchise and operate it until the profits start rolling in? Will there be sufficient profit left once you’ve paid all of your expenses?
- What are the initial and ongoing fees? Are there any other hidden costs?
- Will you get the exclusive rights to the territory for the length of the franchise period, or can the franchiser sell a second franchise in your territory? If the answer to this question is “yes,” what is your protection against the second franchising company?
- Have any franchised units failed during the past 12 months? If so, what were the reasons?
- Is the franchiser a member of a reputable franchise association? Have they ever been refused membership?
- In the event of a dispute between the franchiser and the franchisee, how will it be dealt with?
- What is the procedure for terminating the agreement, and what are the consequences of doing so?
- How is the communication between the franchiser and franchisees? Is it possible to talk freely to existing franchisees?
- What are the franchiser’s long-term plans for the future of the business?
Though business surveys show that fewer than 20 percent of all franchised businesses fail compared to the 60-80 percent failure rate for all new businesses started each year, it’s important that you investigate a franchise opportunity thoroughly. The checklist above will serve as the starting point of your franchising journey. If you can get the answers to each of these questions, and those answers satisfy you, then you’re on your way to becoming a proud franchise owner.