What to Consider Before Buying a Franchise

What to Consider Before Buying a Franchise

For most people,investing in a franchise appears to be a quick way to create a profitable business. However, even if you are considering buying a low cost franchise, there are risks involved. You must focus on the details in your franchise agreement to get the best opportunity and return on your investment.

What to consider before buying a franchise

Owning a franchise business remains popular because they provide a proven model of success. Some of the world’s most successful franchises include, McDonald’s and Subway, as they are known for investing in restaurant software to maintain customer satisfaction.

Before you purchase a franchise, here are some things you need to consider.

1. The total cost of operating and owning the franchise

The franchise cost and forecasted costs for the first three years are normally included in the franchise agreement. When considering purchasing a franchise, you have to think about hidden costs that may not be evident.

These hidden costs include: 

  • Travel expenses to attend training classes.
  • Professional fees for legal and accounting services.
  • Costs of hiring.
  • Property and liability insurance.

When calculating the total cost of owning a franchise ask the following questions:

  • Does the total cost include inventory, leasehold improvements, advertising, promotion and equipment?
  • What other costs are included?
  • What is the minimum cash commitment that must be made?
  • Can the franchisor provide a complete itinerary of all the costs involved?

2.  Consider trends before buying a franchise

Before making a financial commitment to owning a franchise, you need to ensure you mitigate one of the risks, which is that the franchise is based on a fad or a trend.

Find out whether there is a continuous demand for your service or product before buying a franchise. Conduct research to find out how long the franchise has been in existence and whether you believe the product will continually be in demand.

Ask yourself the following questions when determining whether there will be a lasting demand before buying a franchise:

  • How many competitors are there?  
  • Is it expected that many more competitors will enter the market in the near future?
  • Does the product have a reputation for great service and brilliant quality?
  • What is the comparison in quality of the product in relation to competitors?

3.  Consider relationship between yourself and the franchisor before buying a franchise

Owning a franchise means you will be entering into a fully committed long-term relationship with the franchisor. You need to consider the extent of this relationship along with any associated parameters and restrictions, before agreeing to enter into a franchise agreement.

Before purchasing a franchise, consider how the franchisor is paid and whether you need to pay a franchise fee and royalties. If you must pay royalties, determine the percentage and frequency. Also, be clear about what you get as a franchisee for your royalty payments.

Ask yourself the following questions when evaluating the on-going relationship between you and your franchisor:

  • Is the franchisor enjoying stable and strong growth?
  • Does the franchisor have detailed information that you can present to a financial professional like an accountant?
  • Does the franchisor have a disclosure document?

4.  Consider expansion and growth plans before buying a franchise

You must be clear about the extent of your franchisor’s plans to grow the franchise. If the plan is to expand the franchise into the area you plan to invest in, this means your potential area could be flooded with other franchises. This will make the competition tougher and may have a negative impact on your profits when owning a franchise.

Ideally, you should get a guarantee of exclusivity in your location so you don’t end up competing with another franchise near to you. You also need to find out how the franchisor will expand the service or products they are offering when considering buying a franchise. Find out whether they are preparing to introduce new products and new technology to stay ahead of the competition.

Ask the following questions to determine your franchisor’s intention to expand and grow the franchise you’re about to own:

  • What are the targets for growth and how have they performed against previous expansion targets?
  • Is the area you are thinking about opening your franchise somewhere that has enough foot traffic or customers?
  • Will you be given exclusive rights to the services or products in the area where you wish to open your franchise?

5.  Consider the level of support before buying a franchise

Owning a franchise means you need to be familiar with many different aspects of running a business, as well as managing the franchisee and franchisor relationship. You must determine whether the franchisor is willing to support you in terms of all aspects of running the business.

For example, advertising, marketing and technical issues. Some franchisors are more involved in providing support,training and development than others. Depending on your needs, you must determine what kind of franchisor relationship you want. If you are a seasoned business owner, you may prefer a hands-off approach.

Ask the franchisor the following questions when considering to buy a franchise:

  • How long is the initial training to operate the franchise?
  • Is this training ongoing and if so, are there any costs involved?
  • Will you be allocated a dedicated mentor or team you can contact if you run into difficulties? 

6. Consider hiring process before buying a franchise

A large part of running a successful franchise is sourcing the right staff. You need to find out whether the franchisor will help you with hiring experienced candidates. Find out about the hiring process before owning a franchise, whether they use recruiting agencies or whether you will be required to source qualified candidates yourself.

You should ask these questions in relation to hiring suitable candidates when you consider buying a franchise:

  • What is the hiring process?
  • What is the typical time to hire?
  • Would recruitment agencies be used?
  • What are the fees associated with hiring experienced candidates?
  • Do they use modern hiring software, like Fountain to streamline the hiring process and keep costs down?

Fountain is designed with franchises in mind and so makes hiring for multiple locations easy and seamless. With features, like customer filters to prioritize candidates and branded applicant portals, you will be able to source and recruit the best candidates for your franchise while saving time to focus on other areas of your business.

Read this case study to find out how The Turas Group uses Fountain to manage nearly 2,000 applicants per recruiter when hiring for successful franchises, like Chick-fil-A.

7. Understand your competition when considering buying a franchise

The amount of competition you face when owning a franchise will depend on whether the brand is well-known. Generally, the better known the brand, the more rival companies there will be. Owning a well-established franchise makes sense because people are already aware of the brand, therefore, they will trust your business.

However, this is a risk because the area may already be saturated with competitors. You need to decide whether you want to go for a well-known franchise or accept another type of risk; with a more unique and unknown product or service where you have less competition, but may also have less consumer confidence.

8. The legal aspects of owning a franchise

When considering owning a franchise, you must consult with certain professionals to ensure everything is above board. Hire a lawyer who can explain all the terms and conditions.This lawyer should be independent of the franchisor to ensure you are receiving impartial information.

Your lawyer should look through all the documentation to identify franchise risks and  raise any red flags. Reviewing documents with your lawyer should take as long as necessary. If you find your franchisor is pressuring you to decide and sign contracts before you understand everything, then you may want to reconsider entering into this relationship.

Here are some questions to ask yourself when determining the legal aspects of owning a franchise:

  • Have you identified an independent lawyer who specializes in franchise agreements?
  • Do the terms of the franchise agreement match what you were expecting?
  • Do the terms of the franchise agreement address different challenges and obstacles you will face and how the franchisor will help you to overcome them?
  • Do you feel pressure to sign a franchise agreement before you are totally comfortable?

9. Am I equipped to own a franchise?

 You need to identify your strengths and your weaknesses when considering owning a franchise. You should list all your skills and your experience and find out whether they match up with the franchise you have in mind. Try to think about what it would be like on a day-to-day basis operating the franchise. Ensure the franchise that you buy plays to your strengths.

10. Consider the track record of the franchisor before buying a franchise

You must ensure the franchisor has a business plan and a proven business model over many years.Find out statistics and facts to ensure any claims they make are backed up.

Research claims of success in terms of the specific area you are contemplating. For example, you may find that certain fast food restaurants may do great in busy metropolitan areas. However, they may not be so successful in suburban areas.

When deciding whether there is an adequate track record to prove a business model ask the following questions: 

  • What is the franchisor’s business record and reputation?
  • Do you intend to contact consumer protection bureaus to find out the information they hold about the franchise?
  • How stable is the franchisor’s infrastructure?
  • Are there any legal actions that are outstanding against the franchisor?

11. Consider the current franchisee’s opinions before buying a franchise

In order to paint a full picture of what the franchisor is like you should contact current franchisees to get their opinion and feedback about their experience with the franchisor before owning the franchise. Be open and honest about the fears you have and ask them whether they have faced similar challenges.

Assure them that you will keep any information confidential so they will be candid with you about whether it’s worth buying the franchise. Although different franchisees will face unique challenges, speaking to current franchisees will help you to think about issues that you may not have thought of previously.

12. What are the restrictions when owning the franchise?

It is usual for franchisors to have different restrictions on how to run the franchise. They are guidelines, principles and standards which need to be complied with in terms of factors, such as:

  • Prices
  • Operational hours.
  • Store design.
  • Product offerings.

Find out the restrictions for every single area of your business before owning a franchise, especially in terms of hiring the best and experienced candidates. This will help you discover how much control your franchisor exercises over your business. Determining whether you’re able to work under such restrictions will be a big factor in whether you buy a particular franchise.

13. Consider if  you are cut out to be a franchisee when buying a franchise?

Linking to the point above, you have to be hands-on and work very hard to make a franchise a success. Coupled with this, you must be aware you do not have full control of your business because the franchisor will have certain requirements and restrictions.

You also need to find out whether you are comfortable with repeating the same type of business tasks on a daily basis when owning a franchise.

When finding out whether you can handle life as a franchisee, ask yourself the following questions:

  • What type of people does the franchisor say is most suitable to run their franchises?
  • What is the typical franchisee profile? 

Conclusion: What to consider before buying a franchise

Buying a franchise is a major undertaking. There are so many aspects to consider. Once you have made the financial outlay and the commitment, you need to ensure every part of your franchise is optimized to give you the best return on your investment.

One of the most important ways to keep your costs down is through smart hiring. Use modern hiring software or introduce modern hiring software to your franchisor for quicker and more efficient hiring.