How Do You Investigate A Franchise?
Many people grow up with dreams of owning their own business one day. They see the promise of being their own boss, financial security, and the chance to hire and manage an all-star team of employees. For some folks, that dream is accompanied by a unique product, service or passion, or invention. But what about the people who have the drive but feel like they don’t have any business ideas? Or the ones who can’t palette the risk of starting a business with lower hopes of success? Fortunately, there is an alternative to the traditional small business or start up approach…franchises.
The franchise business model essentially involves a parent company (franchisor) allowing and helping another individual (franchisee) to own and operate a licensed location of the franchise. For example, think of any fast food restaurant. Most locations are owned and operated by different franchisees, but they all fall under the bigger umbrella of the franchisor. There are lots of advantages to this approach and plenty of reasons why you should start a franchise, but like everything in life it’s about finding the right fit.
There are lots of things to consider before buying a franchise, from figuring out whether franchising is the right choice for you altogether to deciding what company to work with. In this article we discuss all the things that go into investigating and evaluating a franchise before you decide to start one. We also look at questions like:
- What are some of the factors to consider before buying a franchise?
- What questions to ask when considering buying a franchise?
- How do you evaluate a franchise?
How Do You Know if a Franchise is Right for You?
Part of investigating franchises is investigating the franchise model. Before you can determine which franchise is right for you, you have to first decide whether the franchise model is right for you. Owning a franchise has its pros and cons, as well as a certain set of requirements. Let’s dig into each a bit more deeply.
Pros of Owning a Franchise
One of the reasons its important to understanding the pros of owning a franchise is that they help you hone in on whether or not you want to commit to franchising. Some of the pros include:
- Buy a company with a proven track record and model. The risks of buying a franchise tend to be inherently lower than starting a business from scratch because the parent company already has a proven method for success.
- Start a business with support from a successful parent company. Beginning a business can be daunting, but with the help, training, and guidance you get from the franchisor you are not in it alone. Their tips and support system will help to ensure your success. After all, their success is directly correlated to yours, meaning the more money you make, the better off they will be.
- A path to expansion. Is your dream to have a small business empire or to be a staple of the community? Even as a first time franchise owner, it’s possible to make that dream a reality. Generally speaking, once you buy one franchise, you may have the opportunity to purchase one or more additional franchises from the parent company. You could have several locations in the same city, or branch out across a larger geographic area.
- Instant brand recognition. From the get go, once you buy the franchise, customers will already know your brand, your value, and what to expect when they walk through your door. It’s easier to build loyalty and organic traffic when you have a name people recognize and trust from day one.
Cons of Owning a Franchise
Just like the pros help you determine if franchising is right for you, knowing the cons and drawbacks should also inform your decision. If any of the following limitations of franchises are a deal breaker, a franchise might not be the route for you.
- Startup costs. Starting any business is going to cost money, but depending on the franchise you want to open, these fees can be tens to hundreds of thousands of dollars. We will talk about startup costs in a little more detail when we discuss the requirements of franchising.
- Royalty payments. The backbone of franchising and licensing deals, royalty payments mean that part of your gross earnings will be sent to the franchisor each month as part of your business agreement. Depending on your fee structure and start up costs, this can range from about 4-12% per month depending on what company you partner with to franchise.
- Limited creativity and flexibility. When you buy a franchise, you are committing to a certain business and model. After all, the appeal is owning a successful business with a proven record. That means the way you operate the franchise will have to align with the franchisor’s model. So, if you are someone who is excited about being their own boss, but also wants the freedom to call all the shots, then franchising might not be what you are looking for.
Requirements to Start a Franchise
The final piece of the puzzle to knowing if a franchise is right for you is understanding the startup requirements. When it comes to starting a franchise, there are a handful of requirements to consider.
- Startup Costs: Like we mentioned earlier, you will need some initial capital to start a franchise. With that in mind though, you don’t always need thousands of dollars. For example, on Franchise.com we have business opportunities and franchises that don’t require much of an initial investment to some that require several hundred thousand dollars. It all just depends on what you are looking for and, more importantly, what you can afford. So if you were wondering how to buy a franchise with no money, our low-cost options might be right for you.
- A Business Plan: Creating a business plan is like creating a roadmap for your franchise. You will need to detail the goals you aim to accomplish, how you plan to achieve them, and what resources will be required along the way.
- Franchise Disclosure Document (FDD): The FDD is a legally binding document that outlines the exact nature and details of the franchisee and franchisor’s relationship. It will include the business model, fees, commitments, expectations, and so on.
- Physical Space: Naturally if you are opening a brick and mortar franchise, you will need a store location. Typically the franchisor will have to sign off on the location, design, and if necessary, renovations or construction required.
- Training: While your store is still being completed, you may be required to attend training hosted by the parent company. They will teach all the ins and outs of daily tasks and big picture operations.
Once you have evaluated all the pros and cons as well as the requirements to start a franchise, you can determine if franchising is the best route for you. If the answer is yes, then the next step is simply to find the best business to get in business with.
What Should You Consider Before Buying a Franchise?
Before you commit to a specific franchise, it is important to find the right fit. There are tons of franchise opportunities available, so finding the right one might take a little bit of time, effort, and research. A good place to start is by asking yourself some questions to figure out what really appeals to you.
Questions to Ask Yourself When Buying a Franchise?
Asking some of the following questions can help you gain clarity on which franchises are the right ones to purchase.
- What am I passionate about?
- How much can I afford to spend on startup costs?
- Do I want the chance to own multiple franchises?
- What am I looking for in a parent company?
- Do I have the ability to lead employees in this industry?
- How many employees do I want to manage?
- Do my values align with the values of insert company name here
- What kind of fee structure am I willing to commit to?
- Do I have the characteristics of other successful franchise owners of this same company?
While some of these questions are simply internal, some of them will require a bit more research. That’s where Franchise.com comes into play. With Franchise.com you can find all the resources you need to research a franchise.
How to Evaluate a Franchise
Before you commit to buying a franchise, it’s important to do your due diligence, even if it seems like the perfect match. You need to evaluate whether or not the franchise is generally successful, what to be aware of in a franchise agreement, and make sure you proceed with an appropriate amount of caution.
One great place to start is by talking to other franchise owners under the same parent company. You can ask them about their experience, what things went well, what things didn’t, etc. They might have valuable insights, be full of praise, or warn you of the shortcomings of the franchisor. While all of this input is valuable, it’s important to reach out to as many people as possible so that you get the most unbiased feedback to inform you.
You can also look at the financial documents of the franchisor to understand whether or not you are talking to a business that is successful or not. In fact, their financial statements should be included in the FDD.
Similarly, before you sign a franchise agreement, be sure you understand exactly what it says. Don’t be afraid to ask for legal help from a franchise lawyer. Make sure you understand everything in there, including:
- Length of the agreement
- Fee structure
- Noncompete clauses
- Breaches and termination
- Operating rule
- The expected schedule
There is much more to understand in a franchise agreement, and any reputable franchisor will understand and respect your desire to know exactly what you are getting into before signing.
Franchise.com is another great resource for evaluating franchises. We have all the information and resources you need to make an informed decision.
Franchise.com… Your Guide to Franchises
Franchise.com is here to help you at every step of your franchise journey. Wondering whether or not a franchise model is right for you? We can help. Trying to find local franchise opportunities? We can help with that, too. Don’t have a lot of startup money? Don’t sweat it, we have affordable options. Thinking “how would I investigate acquiring the franchise I want to buy?” Look no further than the resources on our website.
Whatever your franchise questions or needs are, we have the information and resources you need. The same goes for you franchise interests. Are you into fitness? We have an opportunity for that. Do you dream of being the owner of a local ice cream shop? We have a business for you, too. From automotive to travel, we have franchise options all along the spectrum. So, if you’re ready to start living your dream today, head over to our website to find the perfect franchise for you.