Franchising 101

Question: I have been thinking about starting my own business. Friends have suggested buying a franchise. What questions do I need to know before taking this path?

Answer: You have three alternatives: start your business from scratch, buy an existing business or buy a franchise. Too many franchise purchases are done on a whim, so you are on the right track thinking about what questions to ask before investing your hard earned retirement funds. The one advantage of a franchise over starting your own business is that if you excel at the business side of the enterprising equation, the franchisor provides the technical side. If you excel at the technical side, then the franchisor can provide you with systems that have proven successful. After you have found a business of interest, then think about these questions to ask when evaluating a franchise.

Read the Franchise Disclosure Document. By law, each franchisor must have a formal Franchise Disclosure Document. After you have thoroughly reviewed it and noted your questions, locate a franchise law attorney and have the document reviewed. Why a specialist? Because franchise law is a specialty and your investment requires the best advice you can get. Get an estimate beforehand, so you know what your investment will be to get a legal opinion on the franchise.

Talk to current franchisees. What is it like to be a franchisee? What is the typical day like? How many hours per day, week, or month does the franchise require? Would you buy this franchise again? What is it like to work in this franchise environment? What are the most common issues a new franchisee will face? If there is a conflict, how is it resolved? Check out and Look for negative chatter about the franchise. All before you have a detailed discussion with the franchisor.

Find out what the turnover rate is or how many units changed hands in the past year? If there are a lot of sales of existing franchises, this is a sign of trouble. The Franchise Disclosure Document will disclose this data. At the same time, investigate the failure rate and what was the cause of failure? Find a franchisee that failed and ask them about the issues surrounding their ownership.

What support does the franchisee get beyond the initial training? You also will want to do the following:

Visit a franchise in a geographic area other than your own. See how it operates and assess how you will function compared to the one observed.

Speak with owner/operators (of your choosing, not the franchisor) to fully understand the finances of opening and sustaining yourself while you grow your business. Find out how many months did the franchise take to break even? What kind of revenues and gross profits can be expected in years 1, 2 and 3?

Find out if there were any expenses that were unexpected during the startup and ramp-up?

And, after you have reviewed everything you can, would you recommend a friend buy this franchise?

If you are a prospective franchise purchaser. Enter the process with your eyes wide open and make sure you leave your rose colored glasses at home.

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