Franchise Basics – How to Buy a Franchise

By Kelly Mangum |February 26, 2018

Investing in your own business can be one of the most critical decisions one will ever make. When you are looking at how to buy a franchise, the challenges are enormous. Even finalizing a decision to own one’s own business is daunting in itself. Many budding entrepreneurs back out early in the decision making process.

Usually individuals wanting to strike out on their own were never responsible overall for: sales, marketing, human resources, customer service, quality assurance, operations, legal compliance, accounting, and much more. When owning a business, including a franchise ALL of those roles will often be carried out on a daily basis, but the owner, unless the franchise system provides these services to it’s owners.

In principle owning a franchise will reduce the risk of not having conducted many of those roles for those brave individuals who ultimately decide to become a franchisee. The foundation of business format franchising is that the franchisor has developed a system, which has been proven successful, and can be duplicated by others…otherwise know as franchisees.

When a business, whether it be associated with food, automobiles, building, or consulting (there are many franchise industries) decides to grow by franchising vs. a product or service distribution scheme, that business must develop documented systems which have contributed to that business’ prior success, and which can be replicated by its future franchisees. The new franchisee will be trained and provided with, or access, to manuals covering the mission critical functions referred to earlier.

While some companies want only basic information, others will want the candidate to provide much more so they can better qualify inquiries. Some companies receive literally hundreds of inquiries about ownership a day, from seemingly interested people, many of which are not qualified to own their franchise. Expect to receive a phone call from the franchisor, and if you are genuinely interested in becoming a serious candidate, then it is imperative that you respond, in order to be considered a genuine contact.

There are SO many franchises to consider how can you choose which one may be best for you? First have some knowledge of your financial capability. Do you have capital available to invest? Don’t forget the possibility of obtaining additional capital for the investment from a loved one or a friendly investor.

Next, think about what you like to do, and what you do not like to do, and choose accordingly. If you don’t like working with the public, then a retail business should not be considered. If you like working with children, animals, crafts, or involvement in sports, then target a franchise in that matching category.

After you speak with the franchise representative, if you are still interested, and if the franchise is interested in you, then you will be requested to complete a formal franchise application, which typically involes a credit check and sometimes a background check. If you meet the franchisors guidelines, then to move forward by law the franchisor is required provide you with a disclosure document, known as a Franchise Disclosure Document (FDD).

Read the FDD carefully since it will include a vast amount of information on the franchise such as: history of franchise and its key principals, financial statements, litigation, franchise openings/closings/terminations, franchisee contacts, franchise agreement, requirements, and more.

One of your key questions to the franchise representative early on may be “how much money can I make?”. By law a franchise salesperson cannot provide you with an Earnings Claim, unless it is included in the disclosure document. There is no legal requirement that the franchisor must provide you with an Earnings Claim, however some franchisors do provide it. If the franchisor has chosen not to provide it, then it remains important to contact other franchisees listed in the disclosure document. Other franchisees can answer many of your questions. Many franchisors will also require you to visit their headquarters before signing the agreement, so that you can both get to know each other better. This is known as Discovery Day.

Ultimately your new business’ profit or loss will be determined by such factors as your franchise territory, site location (if not home based), and your individual efforts and commitment to following the system. While you will be your own boss, when owning a franchise you will not be on your own. The franchisor will have also committed to fulfill their promises to you as stated in the franchise agreement.


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