Franchising
10 Questions to Ask Before Buying a Franchise
A franchise gives you an established brand, systems, training and support. It is not a guarantee of success, and not every franchise is right for every entrepreneur
Buying a franchise can be one of the most important business decisions you make.
A franchise gives you the opportunity to build a business using an established brand, systems, training, and support. But a franchise isn’t a guarantee of success, and not every franchise is right for every entrepreneur
The goal of due diligence shouldn’t be to convince yourself to buy a franchise. It should be to gather enough information to make an informed decision.
Here are ten questions every prospective franchise owner should ask:
01
What Am I Really Buying
A franchise is much more than permission to use a company’s name.
You may be gaining access to an established operating system, training, technology, marketing resources, vendor relationships, processes, intellectual property, and ongoing support.
Ask the franchisor to explain exactly what you receive, and what you don’t
A strong franchise system should be able to clearly articulate the value behind the fees you pay.
02
What Is the Total Investment?
Don’t focus only on the initial franchise fee
Understand the complete estimated investment required to open and operate the business, including equipment, insurance, technology, marketing, vehicles, staffing, professional fees, and working capital
Then ask another important question:
How much additional cash should I have available if the business takes longer than expected to reach positive cash flow?
Running out of capital can destroy an otherwise promising business
03
What Am I Really Buying
Most franchise systems have continuing financial obligations.
These can include royalties, technology fees, marketing or brand-fund contributions, required software, training expenses, and other costs.
Understand not only how much you’ll pay, but what you’re receiving in return.
04
What Does the Franchisor Provide After I Open?
Opening support is important
Ongoing support may be even more important
Ask what happens six months, two years, and five years after opening.
Does the franchisor provide ongoing training?
Business coaching? Marketing assistance? Technology?
Financial education? Operational support?
New systems as the marketplace changes?
You’re not simply evaluating how a franchise helps you open.
You’re evaluating how it helps you evolve.
05
What Will Be Expected of Me?
This question doesn’t get asked enough.
A franchisor can provide systems, training, technology, and support, but the franchise owner still has to operate the business
Understand the standards you’ll be expected to follow, the time commitment involved, reporting requirements, training obligations, and the responsibilities that remain entirely yours.
A franchise system can provide a blueprint.
The owner still has to build the business.
06
How Does the Territory Work?
Never assume the word “territory” means the same thing in every franchise system.
Ask how territories are determined, what protections apply, what exceptions exist, whether customers can come from outside your territory, and under what circumstances another location could operate nearby.
Understand the actual language in the Franchise Disclosure Document and Franchise Agreement.
07
What Do Existing Franchise Owners Say?
This may be one of the most valuable parts of your due diligence.
Speak with existing franchisees.
And don’t only ask, “Are you happy?”
Ask better questions:
What surprised you?
What was harder than you expected?
What support has been most valuable?
What would you do differently?
Has the franchisor delivered what you expected?
Would you make the investment again?
Real conversations can reveal things no presentation ever will
08
What Do the Financial Disclosures Actually Tell Me?
If a franchisor makes a Financial Performance Representation, study it carefully.
Understand the population represented, measurement period, averages, medians, ranges, assumptions, and limitations.
And remember:
Revenue isn’t profit.
Two businesses generating identical revenue can produce dramatically different profits depending on labor, materials, overhead, marketing, pricing, productivity, and management.
Have your own accountant or financial advisor help you understand the numbers.
09
What Happens If I Eventually Want to Leave?
Entrepreneurs naturally think about starting businesses.
Good business owners also think about eventually leaving them.
Ask about the franchise term, renewal requirements, transfer provisions, restrictions on selling, approval of potential buyers, and any rights the franchisor may have regarding a sale.
You’re not planning your exit because you expect to fail.
You’re thinking like an owner.
10
Is This Franchise Right for Me?
This may be the most important question of all.
Don’t ask only whether you qualify for the franchise.
Ask whether the franchise fits you.
Does the culture align with your values?
Do you believe in the business model?
Are you willing to follow a system?
Do you have the financial resources?
Are you comfortable leading people?
Does the opportunity support the future you’re trying to build?
The objective isn’t to find a perfect franchise. There isn’t one.
The objective is to find the right fit between the system, the opportunity, and the owner.
Final Thought
Buying a franchise shouldn’t begin with excitement.
It should begin with questions.
Ask difficult ones.
Read the Franchise Disclosure Document carefully. Speak with franchise owners. Review the economics. Consult your attorney and accountant. Understand the system and understand yourself.
A better decision starts with better information.