There are many factors you should consider when buying a franchise business. Since starting a business involves investing your time, money, and energy, you need to be sure that you’re making informed choices by choosing the right franchise.
Once you decide the path you want to take in franchising, you’ll struggle with certain questions– such as the financial aspects of the business, the support provided by the franchisor, and more. You’ll need to research, conduct due diligence, and weigh your options before buying a franchise. That said, you can contact a franchise law attorney for quick results. So, what questions should you ask when buying a franchise?
What to Know When Buying a Franchise
The following are some of the things to know when buying a franchise:
- Earning Potential of the Franchise
The goal of starting any business is to improve your financial status. Unfortunately, it’s easy for most people to envision a future without financial challenges, but the truth is that it may take some time to break even and start earning a profit. With that in mind, you should seek the opinion of others, such as franchisors or other franchisees to get a rough idea concerning the earning potential of the business–this will also help you make informed decisions
- Research or Due Diligence to Conduct
Before investing in any business, it’s important to conduct due diligence, such as assessing the assets and liabilities of the business, commercial potential, legal details, potential risks, and others. Performing due diligence means that investors do their homework to help them decide whether the investment is worth their time.
It’s a good idea to enlist legal and financial services when reviewing and analyzing financial and legal documents. Starting or buying a franchise is a major decision and hence, it should be approached cautiously.
- Total Investment Required
You’ll need to know the expected initial investment, including the fixed costs, variable costs, and whether such costs are one-time or ongoing throughout the franchise term. Total investment in franchising can include:
- Franchise fee;
- Cost of equipment and machinery;
- Rental and leasing expenses;
- Training and advertising costs;
- Inventory, working capital, and more.
The total initial cost of establishing and running a franchise will vary by franchise and industry but it’s also wise to review the Franchise Disclosure Document (FDD) before making any financial commitments or appending your signature.
- Available Financing Options
After knowing the cost of buying the desired franchise, it’s time to finance the business. There are many ways of financing a business (franchise) but most investors prefer bank loans. Why? Because bank loans can be secured with readily available collateral, such as your home equity. Other financing options for a franchise can include:
- 401(k) business funding;
- SBA loans;
- Portfolio loans;
- Unsecured loans, and more.
- Is Training Provided?
When assessing a franchising opportunity, you should seek to find out the type and amount of training required, and provided by the franchisor. If the franchisor provides training, is it comprehensive and hands-on? Understanding the training aspect when buying a franchise should be part of due diligence and overall research.
Standard training for a new buyer should not be below 200 hours of comprehensive training. Training should include holistic–meaning the buyer should be taken through web-based training, in-store experience, and any other training relevant to that industry.
- Brand Standards
Knowing the brand standards to be followed is something that all prospective buyers should know. This may include the logo, usage of the brand name, and more. Also, the franchisor must ensure that all outlets of the franchised business provide the same brand experience. Established franchise brands typically have tried and true standards while startup franchises have to strive to perfect their brand guidelines.
- Franchisor’s Support
Franchising allows the prospective buyer to access a proven business model instead of establishing their brands from scratch. In other words, you’re replicating an existing and successful business model when buying a franchise. That said knowing the involvement of the franchisor or mother company from the onset is undoubtedly beneficial because you’ll require the extra support, particularly if you’re green in the industry.
- Future Growth and Expansion
No one wants to invest in a business that is not likely to grow or expand. Although opening one outlet is the main focus of most investors initially, you’ll likely find yourself towing with the idea of opening more locations if the business grows. That said, any focused investor would want to know if the franchise they’re interested in is growth-oriented and whether the business will provide an environment that allows the franchisee to achieve maximum potential.
When buying a franchise, ask as many questions as possible to ensure you’re making informed choices. Also, you should involve a legal professional specializing in franchise law for better results.
