The first task before buying a franchise business is to narrow down the choices and specify your considerations. With plenty of particulars to appraise on both fronts, it can be a struggle to reach a decision on the right franchise to choose.
So to help potential franchise buyers get started on that big task, here are the biggest factors to consider:
- The type of franchise
- The investment budget
- The franchise disclosure document
- Questions to ask the franchisor
The type of franchise
Across a range of industries (such as automotive, advertising, tech, food and beverage, and retail), there are several types of franchises that potential franchisees can choose from. Some of them include the franchising of products, manufacturing, business format and investment.
Determine the right franchising system for you by conducting informal interviews with business owners in each of these systems, asking about the upsides and downsides.
Also note that some industries are better suited to the franchising model than others; for example, the food and beverage industry has a large number of franchises, suggesting the industry lends itself to the franchise model. Some industries might also be more competitive compared with other industries.
The investment budget
Franchising a business is a sizeable investment, but the costs still vary depending on the industry of the franchise and its accompanying business model.
Franchises can cost anywhere from around $10,000 to upwards of $1 million or more, so franchisees must be prepared to shell out a lot of money, especially for a franchise that is still starting out.
Investments may also vary depending on the origin of the franchise. For example, the cost of acquiring a new franchise directly from the franchisor might not have the same amount of investment needed compared with acquiring a franchise from a previous franchise owner.
The franchise disclosure agreement
A franchisee must carefully review and discuss the franchise disclosure agreement from the franchisor with a lawyer. The FDA contains, among many important details, the following:
- Franchisor experience
- Turnovers and resources
- Revenue model
Review the franchisor’s experience, including any past and present litigation.
For instance, have the franchisor or any of its franchisees been involved in legal disputes, especially ones which could affect the brand as a whole?
Use this to uncover any possible issues with the franchisor, such as litigations that were not positively resolved or were mishandled by the business owner.
Turnover and resources
The FDA from any franchisor should contain a list of all the business’ franchises, including past franchisees who have already exited the franchise network.
Potential franchisees should look to gain anecdotal data from these past and present franchisees and ask about their experience within the franchise.
Interview them to get a better idea of how the franchisor operates, allowing for an informed decision on whether or not to join the franchise network.
The FDA also gives potential franchisors an idea of how the franchises operate and whether the franchise units are generating enough revenue.
If the majority of a franchisor’s franchise units are struggling with their finances, then that is a significant red flag that must be considered.
Questions to ask the franchisor
Potential franchisees must leave no stone unturned and ask all the hard and important questions, such as those relating to the franchise business’ sales, marketing and advertising approaches; training options; leasing arrangements; product purchasing; employee recruitment and so forth.
Choosing the right franchise will take a lot of work, but all that work spent in considering all of the above factors will become the guarantee to making sure that buying a particular franchise is a good business decision and a worthwhile investment.