What Elements Should You Consider When Reviewing a Franchise?
What a Franchise Offers
A franchise offers an opportunity to fulfill your dreams of being an entrepreneur. When you purchase a franchise, you’re buying instant brand recognition, as well as ongoing support to help your business succeed. However, a franchise is not a guarantee to success. There are several elements to consider when buying a franchise. Before investing in a franchise, consider the following.
When buying a franchise, you’re paying for the right to use the franchisor’s name and receive assistance running the business. You’ll incur initial franchise fees in addition to the types of start-up costs common to all new businesses, such as the expenses of buying and equipping a building and purchasing initial inventory. These initial costs are often several hundred thousand dollars. Also take future fees, such as continuing royalty payment and advertising costs you will be required to pay the franchisor, into account when reviewing a franchise. Read the franchise agreements so that you know how much you’ll be expected to pay.
Franchisors typically control at least some aspects of the franchise’s business through the franchise agreements, which may limit your ability to make changes. They may reserve the right to approve sites you are considering for the business, restrict the goods or services you are allowed to offer for sale, or restrict your methods of operation. This can limit your ability to run your business in the way you see fit, so be sure that you understand exactly how much control they will have over your business.
How will the franchisor support your business? What services will they provide, and will they help if you are struggling to stay afloat? On what grounds can the franchisor refuse to renew your contract? Franchise agreements are for a limited duration, usually ten to fifteen years, and you will want to make sure that you know what will cause the franchisor to refuse to renew your contract.
What is your earnings potential? Gauge the potential demand for the products offered by the company, as well as your local competition. Do you think the industry is in a growth period? Ask about other franchisees’ financial success, but be aware that the franchisor is likely to spotlight their most successful franchisees as an example of how much you could make.
Is the company one you would like to be a part of? Is their reputation positive? Is there strong name recognition? Does the company have a positive financial history, or a record of financial difficulties along with a negative litigation history?
Using the FDD to Review a Franchise
Before purchasing a franchise, carefully review the Franchisor’s disclosure document (or FDD), also known as a Franchise Offering Circular. Under the FTC’s Franchise Rule, you must have at least 10 business days to review this document before you’re asked to pay the franchisor any money or sign a contract. This document contains a wealth of information regarding the franchisor that can help you evaluate whether the purchase would be wise.