8 Things You Need to Know Before Buying a Franchise

Buying a Franchise?

Here are 8 things you need to know before you dive in.

What are the 8 Things You Need to Know Before Diving in Buying a Franchise?

1. Experience

2. Industry

3. Fees

4. Capital

5. Chance of Success

6. FDD - Franchise Disclosure Document

7. Territory

8. Training

Are you thinking of buying a franchise? Well, we don’t blame you! This is one of the most successful business models of the last century, with 785,000 franchise establishments operating around the US today.

One reason for this massive popularity is the array of incentives on offer for budding entrepreneurs. From leveraging the products and influence of established brands to accessing marketing and operational support, you can sidestep many of the usual problems start-ups face in the search for success.

Owning a franchise isn’t all hunky-dory though! What ordinary start-ups lack in experience, authority, and market share, they make up for in flexibility and control over their business. By contrast, franchisees operate under tight regulations dictated by the brand and pay for the privilege of using their brand name.

For these reasons, it’s important to learn more about the pros and cons of owning a franchise before signing any dotted lines. Do you want some help with that endeavor? Keep reading to discover 8 key things to think about before buying a franchise.

1. The Experience

Our first suggestion is to find out as much as you possibly can about the reality of owning a franchise. You could even go and work for one first! You’d learn what it’s like, how they operate, what challenges they face, and how much support they receive.

At the very least, you should research and talk with current franchise owners about their experience. Having this solid grounding in franchise ownership would help in two ways: first, you’d recognize whether or not it’s something you’d enjoy doing; second, you’d glean vital insights into the processes, pitfalls, and perks involved.</p>

2. The Industry

Think about your personal interests, skillsets, and experience levels too. A particular franchise might seem like an amazing business opportunity. But it could turn into a nightmare venture if you dislike the industry and/or have no experience in it.

Good things happen when passion and skillsets align. You’re onto a winner if you can find a franchise in a field you both like and have prior experience in. Take an honest look at your strengths and weakness to decide if the franchise in question ticks those boxes.

3. The Fees

A full understanding of your financial obligations as a franchisee is crucial as well. After all, the initial franchise fee will only be the beginning. You can expect to pay ongoing royalty fees too; some franchisees even have to pay out for marketing, training, and opening day giveaways.

Don’t be caught unawares! Investigate every single cost involved beforehand so you can decide whether or not it’d be a viable business opportunity.

4. The Capital Requirements

Those fees aren’t the only overheads you’ll have to cover as a franchisee though. Like any business, you’ll be buying inventory and paying utility bills, wages, start-up costs, and so on. That’s why it’s important to a) understand how much capital you’ll need in advance and b) have enough of it in the bank to mitigate the financial risks!

Likewise, regardless of the brand in question, it could take some time for your franchise business to be accepted in the community. Make sure you have a sizable financial buffer to weather this initial slow period until the franchise is fully up and running.

5. The Likelihood of Success

Starting a business on a whim rarely ends well. You need to assess the market, identify the demand (and competition), consider potential future obstacles, and, ultimately, determine the likelihood of running a profitable business. Alas, that last part’s often easier said than done for franchises.

Why? Because what works for one franchisee might not work for another!

Success depends on myriad factors, not least of which is an establishment’s location (and both the culture and demand therein). A franchisee’s personal connections make a difference too. Nevertheless, try to work out how many people have had success with a particular franchise, how they accomplished it, and how many failed to try.

6. The Franchise Disclosure Document (FDD)

The FDD is another pivotal piece of the puzzle. This document will tell you everything you need to know about the franchisor and its system- not to mention your potential requirements as the franchisee. Details about territory (more on this coming up), pricing guidelines, products, and various money matters are all included inside.

You must read the FDD cover to cover, understand the terms, and feel happy with the restrictions you’d have to operate under. Avoid signing up for anything that you either don’t understand or have significant reservations about.

7. The Territory

Start researching franchise ownership and it won’t be long before you come across talk of territory. Outlined in the FDD, your ‘territory’ is the area in which you can legally operate and serve customers. It’s imperative that you

1. define your territory clearly

2. choose properly based on size, population density, and setting and

3. avoid or plan for overlap with a competitor’s territory.

Likewise, how many territories, if any, does the franchisor expect to incorporate in the coming weeks, months, and years? How many are in place already? And what are their rules around competing when multiple franchisees operate in the same area?</p>

8. The Training

The best franchisors understand that their success is tied up with the success of their franchisees. As a result, they’ll invest in their learning and be proactive in their development from day one. It goes without saying that these are the organizations you want to buy into.

That’s why you should try to uncover the franchisor’s reputation (and the support they have on offer) before signing any franchise agreement. Inquire about any training opportunities that provide, hands-on assistance they deliver, and so on.

Remember These Factors When Buying a Franchise

Franchising is a hugely popular business model in the US and around the world. And for good reason! It offers a wide range of advantages to everybody involved, allowing entrepreneurs to ‘piggyback’ on the success of established brands.

But that doesn’t mean you should sign any old franchise agreement without thinking it through first! As we’ve seen, this is a big commitment that demands due diligence and insight to ensure you attain the success you deserve. Would you like professional support acquiring a franchise without the fuss of going it alone?

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An In-depth Step-by-Step Guide to Buying a Franchise

Approximately 1 out of 12 businesses in the USA is a franchise business. Opportunities like franchising and entrepreneurship through acquisition are some of the great ideas for business minded people looking to run a business without the struggle of creating a new business from scratch. However, establishing a successful franchise takes more than merely finding an ideal franchisor and financing your business. It is a complex step that requires careful planning and strategizing. You need to conduct comprehensive research, review the necessary documents, and follow the steps below.

Conduct Rigorous Research

Finding out the necessary information is the first step you should take when you need to buy a franchise. Thorough research will ensure that your venture into a field of your interest, within your budget and your qualifications. You need to ensure that you meet the basic requirements necessary to start a franchise and also assess your resources, skills, and interests. Your research needs to involve:

Talking To Franchisees

Take time to talk to current franchisees. Gaining an insight into their experience with franchising will help you avoid mistakes in yours, and examine what they did right and maybe use it for your business. Through franchisees, you will also identify the pros, cons, challenges, and hidden costs of running a franchise.

The Type of Franchise

Choosing the right franchise is an important step. To arrive at the right decision, you will need to examine your skills, the type of environment you want to work in, your interests, and your goals. Depending on your needs and budget, you can find companies willing to sell a start-up or already established business. You should also determine the amount of money you are ready to invest and the profits you would like to make from the franchise. This information will help you choose the right franchise.

The Qualifications Requirements

Franchisors set minimum requirements for their franchisees to protect their bottom line and ensure that the franchisees are qualified both financially and professionally. Qualifications vary depending on the type of franchise and the franchisors, but the standard requirements include a credit score, management experience, industry experience, net worth, outside income, and cash in hand.

Fill Your Initial Application Forms and FDDs

Once you have done your research and identified the franchise, the next step is to choose 1 to 3 companies to consider. These companies will give you a representative who will provide you with information about their company. You will also fill the first application forms and preliminary questionnaires. If the franchise is satisfied with your answers, you will receive a copy of the franchise disclosure document (FDD).

The FDD is a 50+ page document that indicates the fees you need to pay, your responsibilities as a franchise, information about the franchisor, and your responsibilities as a franchisee. Make sure you study this document to ensure that it is a good fit. The federal trade commission mandates franchisors to provide franchisees with the FDD at least 14 days before making any binding agreements.

Review The Agreement

If the franchisor decides that you are the right candidate to acquire their business, they will draft and offer a formal contract. Reviewing the agreement ensures that you understand everything before you sign it, so take time to read through the document and hire a franchise lawyer to help you better understand the terms of the contract. The contract gives you the legal right to own a franchise under its rules and regulations. The contract should indicate the rules on the transfer of ownership, royalty fees, hiring staff, protection of territory, pricing, suppliers, among others. Any promises made verbally also need to be put in writing, and any discrepancies between verbal and written terms should be clarified.

Investigate The Company

Once you have settled on a franchisor, you will then need to investigate the company. Buying a franchise involves developing a relationship with the company; it is vital to make sure that it is the right relationship, therefore, take time to talk to its executives, ask questions and also gather information about the company on your own.

Attending a discovery day is a good opportunity for the franchisee to get to know the franchise. It is an opportunity to learn about their culture and understand the people who will be working with you. Make sure you ask questions and voice your concerns during discovery day. A typical discovery day involves one-on-one meetings, interviews, a visit to the franchise location, and group presentations.

A discovery day is also beneficial to the franchise company. It allows them to get to know you better and assess whether you are a good fit for their company. They will also evaluate your level of enthusiasm and commitment at which will dictate their decision to sell a business to you.

Acquire Finances

You cannot run a business without finances. Before you buy a business, make sure you acquire finances to cover the costs of running a business. Franchisors may help arrange finances, but you will also need to qualify for financing on your own. A credit score of 700 gives you a better chance of securing funding. You can finance your start-up through SBA loans, traditional bank loans, search funds, rollover for business start-ups (ROBS), or a government grant.

Create A Business Plan

A business plan is not only a guideline for your business, but it also aids in acquiring finances. It keeps you focused, helps you achieve your goals, keeps you on the right track, and thorough market analysis gives you a better understanding of your market. Document every detail of your business to ensure that everything runs smoothly.  

A business plan shows investors that they are investing in a company with a vision and one which will last and grow. It helps them understand your vision and passions and shows where their money is going. Franchise opportunities require careful considerations, and creating a business plan helps assess your franchise's visibility.

Talk To a Franchise Attorney

If you are considering franchising, make sure you talk to a franchise attorney. These attorneys specialize in franchising, and they have a vast knowledge of franchising. A qualified franchise attorney will help you know everything that you need to know about franchising. This is because they know what to focus on in the FDD and the franchise contract; writing and working on similar documents gives them better insight. They know what to look for when reviewing the documents.

A good franchise attorney also helps the franchisee choose the best entity for their business. The right entity determines the legal rights and liabilities of the business and its taxation. You can also rely on your attorney for help when things do not work out as you expected. They also form an invaluable asset for the business as they can help negotiate the terms and conditions of the agreement and offer guidance to the vague aspects of the contract.

Picking a Location

Take into consideration the guidelines and recommendations of the franchisor to help you find an ideal location. In some cases, the franchisor may have strict rules for commercial real estate, including the number of parking lots, territory requirements, and the minimum squire footage.

Leasing a space is cost-effective, and less risky; however, if you intend to be in the place for more than seven years, consider buying your location. Whether it is leasing or purchasing a space, consider the safety of the area, the location of your employees and customers, the square footage, and negotiate the price. 

Acquire The Necessary Skills And Knowledge Of Running A Business

Before you open your business, take the opportunity to acquire the necessary skills and knowledge to run a franchise. Typically, the franchisor will provide training sessions that will tackle everything you need to know about the business, including the policies and guidelines, the products and services the systems you will be using. Working in a store is an ideal way of determining how a franchise works and whether your skills and personality match the company culture.

Open Your Business

This is the final step; it comes after you have finalized everything, and the franchisor representative approves your location. The franchisor will give you a hand during the actual opening. Marketing your grand opening is an excellent way to promote and market the business. It ensures that you build your customer base quickly. Before the grand opening, potential alert customers of the existence of your store, and you can also do a soft opening to identify and deal with the operation problems before the grand opening. The franchisor has pre-determined promotion ideas, signage, and ads for the grand opening in most cases.

It is worth noting that franchising does not eliminate the risks of owning a business. However, it allows the entrepreneur to handle the responsibilities that come with owning a business. It comes with an already Get Matched Now.

BizNexus -Learn More From Our YouTube Playlist:

BUSINESS ACQUISITION

Have you checked out our podcast?

THE BIZNEXUS ROUNDUP

Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.