25 Questions you must ask when Buying a Franchise

First Financial Equipment Leasing, Franchise Purchase, SBA Loan, Starting a Business 1 Comment

1: Why should I trust you?

This is a straight forward important question that may make the franchiser you (or even yourself) are asking uncomfortable, however, you first and foremost must establish grounds for a personal relationship that is open, honest and direct. You are considering a major investment into his/her business model and before you begin discussing the business, be sure you understand and get to know the person(s) you are willing to buy into. Learn what motivates and drives this person, who they are, what their ethics and beliefs are about. Once you have established this, and then start your discovery process in the business opportunity.

 2: What is the company (story) history?

The response to this question is important because you want to learn about the evolution of the concept including if there initially was or is a company owned and operated store with an established track record of success.

if more money is made from non-royalty income versus royalty income, that’s a red flag
Also, learn its financial history and find out if the franchiser is adequately financed for growth that coincides with his vision. Learn specifically how the franchiser makes money including from what sources. Keep in mind that if more money is made from non-royalty income versus royalty income, it is a red flag for you.

3: What do you have to pay up front?

Franchisers make money up front and are entitled to do so. They charge a franchise fee that averages $35,000.00 industry wide. Depending on the specific concept the franchise fee alone can range from $0 to more than $100,000.00. Further, fees for training, support, equipment, software, future royalties, liquidation, franchise transfers, etc. are generally expected. Details of these fees are available in the FDD produced by the franchiser and legally required to be provided to all prospective franchise owners.

4: Can you depend on verbal representations of the franchiser or his representatives?

No. If any information is presented to you and is not spelled out in the disclosure document, do not trust it.

5: How much money should I budget for living expenses during my initial phase of start-up?

They type of franchise business will dictate the answer here. For example, if you buy a franchise that requires selecting a real estate site, you likely need to have between six (6) months and one (1) years of living expenses available.

you likely need to have between six (6) months and one (1) years of living expenses available
Don’t quit your day job until you are ready to leave for training and you have identified your site and finalized your legal agreements to lease, rent or purchase your site.

You can use loan money to pay yourself during the ramp up phase.

6:  What are the predominant problems I should expect during the first year of operations?

(i.e. sales, good employees, undercapitalization, sales shortfalls, delayed cash receipts, time management?)

These are not negative questions, they’re realistic and practical. It’s easy to be optimistic and excited when buying a new business. But, don’t fall in love with a concept until you thoroughly understand its upside and downside. There is no substitute for complete due diligence.

7:  How much litigation has the franchiser experienced?

This answer can be found in the FDD. Be careful, too many lawsuits are a red flag. Further, keep in mind that the disposition of a suit is described by the franchiser and his legal counsel. This franchiser description can be misleading intentionally or unintentionally.

the disposition of a suit is described by the franchiser and his legal counsel. This franchiser description can be misleading intentionally
Generally, it is best to investigate county records to read about various past litigations if you suspect that the descriptions are ambiguous. Some franchisers will do their best to bury the story or generalize the details to the extent that its difficult to find clarity.

 

 8:  Where and how can the franchise contracts be changed after they are executed?

While contracts are intended to create a meeting of the minds and a complete understanding of the terms of purchase, there are pitfalls that aren’t always so obvious. As an example, the franchiser often has the right to make unilateral changes to the operations manual including a variety of issues that can impact your cash flow at inopportune times. Be sure you understand all related documents and manuals and where changes can impact your expectations or understanding of the franchise opportunity.

9:  What happens to my franchise if the franchiser goes bankrupt?

Although this may not be a common occurrence, it does happen. Learn about your options if this were to happen during your ownership period.  This is an area that needs to be seriously discussed with your legal counsel since the implications vary from State to State.

 10:  Who are your Board Members?

This information is found in the FDD, Item #2 under Business Experience, however, you should find out if they are passive or active in the business. The more active they are (i.e. founders) and involved in the business, the better, generally.

11:  Is there a franchisee association within your franchise?

Having an established franchisee association is very common and should not be denied by the franchiser under any circumstances. Further, in my experience, a good franchiser may also welcome a representative of the franchisee community to retain an Advisory Board (or Committee) seat in the franchiser organization.

12:  Have you ever granted royalty relief to a franchise owner and for how long?

This is another indicator of potential franchisee problems and may raise a red flag you should investigate closer. Royalty relief is often a result of a variety of issues including but not limited to operational problems including, training, support, burdensome unit upgrade demands or advertising disputes.

13:  How many units are you planning on opening in the next two years?

Does the answer coincide with the home office support levels. This response should prompt you to get an indicator of how realistic the franchiser is being and how much different is it when compared to the previous two years.

14:  Do you sell, or do you plan to sell your services or goods through any other distribution channels including under other names or companies?

  Most franchisers are interested in protecting the franchisee and looking after them to be as profitable as possible. The more profitable the franchise owner is the better the royalty income is for the franchiser. This is not widely problematic for most concepts. What you should ask as a follow up is whether or not the franchiser has distribution channels other than franchisees for the same products under a different brand name. If so be sure to dig in and find out how this could potentially affect you in your market and how it could affect the overall business of the franchiser long-term.

15:  Can I work in an existing franchised unit before I sign a contract?

This is often an excellent idea. In fact many good franchisers encourage prospective owners to do this for a week or two in order to “test the waters” to be sure it’s a concept you’ll truly enjoy being a franchisee in.

16:  What are the guidelines to owning multiple units?

Franchisers typically don’t permit a first time franchisee to operate more than one unit during the first year of operation. Once you have proven that you can and will comply with the system and you are profitable, then most franchisers will permit you to build or own additional units. This should be a part of your long term plan since multi unit owners are often the most successful franchise operators.

17:  Will you help me negotiate my lease or purchase?

Franchisers may provide some help here, but you would be better served with the help of your attorney, experienced business advisor or real estate broker.

18:  Will you help me negotiate my lease or purchase?

Franchisers may provide some help here, but you would be better served with the help of your attorney, experienced business advisor or real estate broker.

19:  Is the franchise fee refundable at any time?

This is generally non-refundable, but often subject to certain requirements being met. This is an area where your franchise attorney can help you protect your payment by reviewing and insuring that there are no unexpected surprises here.

20:  What is your exit strategy?

As a rule in any business, it’s just as important to understand your options for getting out of the business as it is getting in. Ask the franchiser about their plans and the timing of such plans; this may influence your decision and timing as well.

21:  Is training and follow-up assistance available?

ask the franchiser if he has dedicated employees who are available everyday for franchise owner assistance
In nearly every franchised system there is a system in place to provide training and follow-up support. Therefore, ask the franchiser if he has dedicated employees who are available everyday for franchise owner assistance. Also, as a rule of thumb , it is not unusual for up to 10% of the franchisees within any system to request assistance or raise operational concerns about a various issues in any given month.

22:  What is the largest single risk involved in your opinion?

Usually you are. It is true; you are most often your own worst enemy. You must be honest in evaluating yourself for franchising. If you have a tendency for raw entrepreneurial start-up experience, you may not be the best choice to enter into a franchisee relationship. You may be a better franchiser. Franchising provides you a track to run on, if you feel you must constantly make improvements or redesigns in the system along the way, you are likely in for a wreck you don’t really want.

23:  What do your existing franchisees say about the company? Are they happy and successful? 

This is one of the most important questions that need to be addressed by you thoroughly. You must do two things in my opinion; first contact as many franchise owners in the system you are considering and then be prepared to ask lots of thoughtful questions. Second, I’d recommend you check out www.fransurvey.com and see if the franchiser submits to an annual system wide audit of its franchise owners. Fran Survey is the only franchise survey company in the U.S. to conduct truly comprehensive screenings of franchisees.

24:  How does your franchise compare to other franchises in the same industry category group?

Today franchising is growing at an unprecedented rate because the model historically offers greater safety and success for investors and operators (franchisees). This success gives rise to competitors who also want to achieve similar rewards. You should look at as many competing franchises as possible after you have narrowed your industry category choice.

25:  How many units have you opened in the last 12 months?

This is an important indicator of market trends and managerial skills. Trends here are the most important item to watch. If the trend has suddenly stopped or slowed, ask why. What has happened?

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TRUSTED RESOURCES

International Franchise Association

Franchise Research Institute (independent franchisee survey info)

Entrepreneur Magazine top 500 franchises guide

Franchise Secrets – Franchise Buying and Reviews

Comments 1

  1. If you know about how the company, or franchise, has operated over the years it could help you measure the success to decide whether or not you want to purchase it. When you look at the history you’d probably want to have another professional look at it so that you can both analyze what you’ve learned. A professional who specializes in buying franchises would probably know what to look for that could show whether or not the company is a good or bad investment.

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