Questions you must answer before buying a franchise

By Susan Payton | Small Business

Owning a franchise can be a great lesson in entrepreneurship, but the rules for franchises are different than for other small businesses. Know what to expect before you invest.

Many entrepreneurs assume that buying a franchise is a sure-fire way to make a great deal of money. After all, look at any McDonald’s and you can see that people are spending millions on hamburgers. Owning just one franchise should help you get a portion of that, right? That’s not always the case.

Buying a franchise is like buying or starting any business: it requires careful research and planning. And while some marketing structure is provided by the franchisor, it can be necessary for you to come up with your own marketing tactics to make enough sales to pay your employees.

1. Know What You’re Getting Into. Whether you’re buying an existing franchise from the current owner or starting your own franchise directly from the franchisor, do your homework on the company. Understand what the brand stands for, and what its practices are. Understand if there are any pending lawsuits against the brand, or if it is filing bankruptcy. These are all factors that will affect the success of your franchise.

If you are buying an existing franchise, look to understand why the current owner is selling. Is he simply looking to do something else, or did the business drain him of time and money? It can be difficult to ascertain the real reasons, if they are negative, for him selling, so ask other businesses near the franchise what their impression of both the location and the owner are. You may uncover major problems that you don’t want to inherit.

2. Know What it Will Cost You. Certainly, the fees for purchasing a franchise should be outlined in the franchise agreement, but be aware that there are many other fees you will be responsible for, including:

  • Monthly royalty fee paid to the franchisor
  • Credit card processing fees
  • Equipment leasing
  • Inventory
  • Overhead
  • Payroll
  • Benefits

Do some quick calculations, using the projected monthly income, as well as all of these expenses, to understand what your base profit should be. This can help you determine whether you can afford to pay yourself, and whether the investment is worth your time and money.

3. Know the Franchise Rules. Franchises are notorious for having many requirements of their franchise owners. You will likely be required to participate in national promotions and marketing efforts, but find out what restrictions there are on any marketing you do beyond that. Can you mark down items based on your own discretion, or are you required to use the franchisor’s pricing? Going against these regulations can cost you a great deal in fines.

4. Know Your Regional Protection Rules. If you invest in a fast food chain and another one sprouts up less than a mile away, your business will be cannibalized. Talk to the franchisor to see what, if any, guarantees it will make about territory rights for your location. Get this outlined in your franchise contract.

5. Know Your Health Regulation Requirements. Each state or city has its own health certification requirements. You will likely need to take a certification test proving you know how to run a sanitary kitchen, and you will get visits from the health inspector to ensure that everything is up to code. But are there other documents that need to be filled out? Registrations to be completed? Missing even one can shut down your restaurant before it even opens.

6. Know What Employees are Like. If you’ve never hired teenagers to represent your brand, you may be in for a shock with how little they actually care about presenting a good face for your business. They’re late and quit their jobs at the drop of a hat, so understanding turnover and training, and the time it will take from you, is important before signing on the dotted line.

7. Know How Much Time This Will Take. Getting a franchise off the ground will eat all your time. From meeting with contractors to remodel your space to buying bananas when you run out, and from training to actually working the cash register, you will take on more roles than you can possibly imagine. Hiring a manager can help with this, but as the franchise owner, you can’t simply walk away and expect your business to thrive without you.

Franchises can be a great entry into the world of business ownership, but go into it with your eyes wide open. Understand the pitfalls that franchises face, and know the possibility of failure is always present. Create a solid business plan to ensure that you are prepared for the obstacles to come.

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