Everything You Need to Know Before Buying a Franchise

 

Photo by Mike Petrucci on Unsplash

If you’ve ever considered owning a business of your own, the option of buying a franchise has to be a serious consideration. Of course, deciding between buying a franchise or an independent location involves a number of important factors:

  • You need to determine if franchising is right for you, personally, and your professional goals.
  • You should consider the pros and cons of franchising versus running an independent business.
  • You’ll also want to evaluate each potential franchise purchase based on its unique strengths while paying attention to any warning signs that could mean you should steer clear.

Going through the following tips, you’ll be in an excellent position to decide if buying a franchise is the best way for you to fulfill your entrepreneurial dreams. Let’s begin by determining if franchising is right for you.

Is buying a franchise right for you?

To help make this self-examination, consider the following five personal and professional traits shared by all successful franchise owners. If the following descriptions apply to you, there’s a good chance you could succeed as a franchise owner too.

  1. You don’t need to control everything. Since franchise owners must defer to the parent company for decisions regarding nearly every aspect of the business, entrepreneurs who want and need full control will feel stifled. On the other hand, if your fulfillment comes from running a well-oiled machine according to strict, proven rules, franchising is a perfect fit.
  2. Risk-averse. Some business owners are willing to risk everything to accomplish their goals. In fact, they wouldn’t have it any other way. Of course, some risk is a necessary part of any entrepreneurial effort, but if your preference would be avoiding or mitigating as much of that risk as possible before pushing ahead, then the tried and true systems making up a quality franchise will appeal more.
  3. Hardworking. It’s vital to realize that, when terms like “simple, “turnkey,” or “duplicatable systems” are used to describe franchises, it’s not meant to imply owning a franchise is a stress-free vacation compared to owning an independent business. Successful franchise owners — like their independent counterparts — have to be extremely hard working people, or they’re simply not going to succeed.
  4. Financially prepared. As noted above, upfront costs and ongoing operating expenses are generally higher with a franchise location than when opening an independent location. These higher costs aren’t generally avoidable because they’re part of fulfilling the franchise agreement, and can’t be mitigated through smart decision making. So, having adequate financial resources available from the start is an important requirement.
  5. Interested in ongoing growth. Most franchisors have built their business models based on plans for aggressive growth. With duplicatable systems and established “territories” in which a location has the best chance at success, you should be able to grow revenue quickly through expansion. If your real goal is to run a mom-and-pop shop or similar one-location business, this growth potential is wasted.

So, do you have what it takes to make it as a successful franchise owner? If you possess the five traits described above, you’ll likely find your dream of business ownership lies in buying into a franchise!

Next, let’s consider both the pros and cons of buying a franchise.

The pros and cons of buying a franchise

While there are many compelling reasons to consider buying into a franchise operation, it’s also important to recognize the drawbacks inherent to doing so. The following are just general guidelines, but they can highlight specifics in nearly any conversation discussing franchise vs. private location businesses:

Pros of buying a franchise

  • A franchise location offers a brand that’s instantly recognizable and a comparatively quick and simple startup through the use of turnkey, duplicatable systems that have already proved effective.
  • If you’re buying a private location that has reputation problems, rebranding it as a franchise could turn that around faster than rebranding it as something brand new.
  • If you’ve never owned a business before, the support of the parent company and the guidance provided from pre-purchase on through every major decision you need to make can be invaluable, meaning less stress and less trial and error.

Cons of buying a franchise

  • Startup costs are usually higher when buying into a franchise due to upfront franchising fees. Also, ongoing fees and royalties can lower your profit margin, so you’re usually going to need to rely on selling a higher volume to make up the difference.
  • As opposed to a franchise, where most of these decisions are made for you, an independent location offers greater freedom to choose things like decor, product and service offerings, branding, theme, and how you market the business. If that’s part of the joy you hope to get from owning a business, it can be a huge consideration.
  • With no franchise fees or royalties required, there’s a chance of higher profit margin in an independent location.

Much of this decision comes down to personal preference, how comfortable you are with owning and operating the business you’re considering, and the availability of independent and franchise locations where you’re hoping to buy.

Even if you’re the right business owner for a franchise, and the pros outweigh the cons in your case, there are still going to be available franchises out there that are right for you, and those that are not. Here’s how to tell them apart before you make your choice:

Choosing the best franchise location for sale

We’ll start by assuming you know what industry you’re interested in buying into. That’s usually a product of your preferences and passions and/or your work experience. Once that’s decided, you can begin scouring lists of franchises for sale and comparing available locations based on the following basic criteria:

  1. Location – If you already know where you want to locate your franchise, your available choices will be slimmer. You’ll need to be patient, waiting for the right franchise to become available in that area, then evaluate other options. If you’re free to explore other areas, more possibilities become available and you can use the rest of these criteria to prioritize them.
  2. Budget – Running a franchise location involves far more than just the purchase price When comparing various options, you’ll need to consider the initial purchase as well as ongoing operating expenses, including franchise fees and royalties. As with any new business, it’s wise to have at least six full months of operating expenses in the bank before your Grand Opening.
  3. Legal considerations – While reputable franchisors should have all the legal issues sewn up in the best possible win-win arrangement, this is an area in which less reputable companies identify themselves. It’s always best to have a lawyer review any franchise agreement thoroughly to make sure you understand and are willing to comply with any and all requirements, and that they fit with your personal business goals.

That brings up an important final subject to consider.

Buyer beware!

It would be naive to assume that every franchisor has the best interests of its franchisees at heart. Just like any other aspect of running or buying a business, “buyer beware” holds true when searching for an optimal franchise opportunity as well. Unfortunately, the franchise space is a popular industry for companies whose only goal is to lure in unsuspecting entrepreneurs and separate them from their hard-earned money. Or, franchisors who really want to help you succeed may be struggling to maintain the level of support their franchisees need and may be hesitant to admit the precarious position they’re in.

In either case, sincere entrepreneurs who are looking to buy a franchise that’s worth the investment need to identify and avoid bad franchise choices, or they risk throwing both money and time down the drain.

Following is a list of eight warning signs to help you identify a franchise you shouldn’t buy:

Signs of a bad franchise

  1. A high-pressure sales pitch. If the person hoping to sell you on the franchise seems desperate to get you to sign, tries to hurry your decision, or relies heavily on discounts to keep you interested, don’t buy it.
  2. Paperwork problems. Both federal and state laws mandate that franchisees need to have access to important documents prior to signing a franchise agreement, including a Uniform Franchise Offering Circular (UFOC) and a Franchise Disclosure Document (FDD). If these, or any other important documentation, are missing, incomplete, or written in a questionable way, don’t buy it.
  3. Salespeople who disagree with the contract. Even if the salesperson you’re dealing with is professional and helpful, and even if the documentation seems perfect if they’re telling two different stories, this should raise a red flag. Legally speaking, what’s on paper is what counts. Skilled salespeople can make a franchise agreement seem more secure, less expensive, or more lucrative than it actually is, so always focus on the facts and take the sales pitch with a grain of salt.
  4. A poor reputation. A simple online search should help you determine what kind of reputation the franchisor has. Do you find a long history of legal problems? Are other franchisees complaining about the company? Has there been recent financial trouble or scandal in the news? While no company is perfect, if you’re seeing a troubling trend, pay attention.
  5. An abnormal number of franchise locations for the age of the franchise. Since the franchise business model is built for aggressive growth, the older and more established a parent company is, the more franchisees should to be onboard and succeeding. If those figures seem out of balance, there’s likely something wrong. A brand new franchisor with a high number of franchisees may be lying or providing little to no support to those business owners. Similarly, a decades-old franchisor with a very small number of franchisees working with them may not offer the kind of support you’ll need.
  6. High turnover rates for franchisees. Item 20 on the UFOC reveals how many franchisees have left the company in the last three years. Generally, the less expensive a franchise is to join, the higher their turnover rate will be. However, a high turnover rate in relation to the total number of franchisees could also indicate the opportunity is not viable or the systems they’re using simply don’t work.
  7. Inadequate training. One of the key benefits of buying a franchise rather than an independent location is the support and guidance the franchisor can provide, including a thorough training program. A solid franchise training program can bring someone who’s never worked in the industry and never owned a business before up to speed fast enough to keep the business alive. If on the other hand, training seems inadequate, it could be a sign the franchisor isn’t setting you up for success.
  8. Constant changes to the system. Another key benefit of buying a franchise is the fact that business operations have already proven successful in multiple other circumstances. If a franchisor is constantly changing methodology or systems, that key benefit disappears.

If the franchise opportunity you’re investigating doesn’t display any of these warning signs, it’s probably worth your time and attention. Even then, however, it’s best to have a team of experts (including a business broker, lawyer, and CPA) available to help review documentation and compare various options before you settle on the right franchise for you.

Provided that you understand the pros and cons of buying a franchise, you’re certain you’re personally a good fit for franchise ownership, and you’re able to identify the warning signs that mark a bad choice, you know everything you need to know to make the best decision when buying a franchise.