Buying a franchise is a great way to start your own business while enjoying the network and support of a bigger brand. However, trying to figure out what is important can be tough for first-time buyers. Here are 8 essential considerations you should make before buying a franchise to help you make the right purchase decision.
1. Consumer Demand
Before buying a franchise, conduct market research and ascertain that your products and services meet consumer needs. This way, you are assured of constant demand, relevance, longevity, and profitability. Look at the bigger picture and don’t forget to study your competitors and the quality of products they produce. This will help you figure out if the franchise you want to buy will be viable or not.
Take note of current trends and identify what sells and is bound to pass the test of time. You don’t want to buy a franchise that will leave you stuck in an unprofitable business. Although studying current market trends is important, be careful not to fall for fads that will quickly disappear in a few years.
2. Required Capital
As you plan on buying a franchise, you need to be certain about how much your financial obligations are. These include the purchase price, working capital and the cost of opening inventory. Remember to factor in hidden costs such as insurance, legal and accounting fees, rent, and even training and travel expenses.
Obtain all the necessary information about the cost of your franchise to make informed financing decisions. Since franchises do not guarantee profitability immediately, ensure you have enough working capital to sustain you until you break even. A common rule of the thumb is to set aside funds that are double your estimated costs.
3. Financing Options
There are a lot of financing options to choose from when you are buying a franchise. You can get financing from your franchisor, acquire commercial bank loans, apply for SBA loans or even crowdfunding. Some franchisors offer as much as up to 70% of the franchise cost when they decide to finance your franchise. You can also apply for SBA loans as they have lower interest rates than commercial bank loans and longer terms of repayment.
Make sure to evaluate all your financing options to ensure you settle for a choice that you can afford. It will surprise you how much savings you can make by comparing different lenders. What’s more, you may even realize that you can afford a bigger and better franchise than the one you intended to buy.
4. The Franchise’s Track Record
The reputation and history of the franchise you are buying can either boost or hinder the growth and success of your business. This can apply to the litigation history of the franchise, the business growth and profitability history, and even franchisor experience. The litigation history is especially crucial as it tells a lot about the relationship of the franchisor with third parties and other franchisees. A franchisor involved in many legal cases with its franchisees is a red flag and you should steer clear.
You also want to make sure that your franchisor knows what they are doing and have solid strategies and a business model that is tested and proven to be successful. An experienced franchisor has more understanding of the industry and is more likely to help you succeed with a working business model as opposed to one that is just starting out. You can always research the history online or by talking to both the franchisor and existing franchisees.
5. What are Other Franchise Owners Saying?
The insights from franchise owners in your line of business are extremely important. They give you the reality of what happens on the ground, so you know what exactly you are getting yourself into. Talk to existing franchise owners and ask as many questions as you can before buying a franchise. You will learn a lot about the market you are venturing into, the support from the franchisor and even the profitability and success rate of the franchise you are buying.
You can find contacts of franchise owners in the Franchise Disclosure Document. As much as success stories are great, franchise owners whose businesses failed will help you avoid costly mistakes. You also learn better ways to handle difficult situations and avoid failure in the long run.
6. Legal Agreements
Before buying a franchise, the franchisor should hand you the Franchise Disclosure Document (FDD). The FDD contains legal disclosures concerning important aspects of the business. You need to go through this document keenly with a franchise attorney so that you have a better understanding of the agreement. If there are areas you do not understand, seek clarification to avoid any future conflicts with the franchisor.
The FDD gives you the opportunity to gauge how your expectations match the legal rights stated in the document and define your franchisor-franchisee relationship. Keep in mind that any pressure to sign the contract is a huge red flag. Only do so if you are comfortable with the contents of the agreement.
7. Franchisor Support
Any good franchise offer training to enable the new franchisees to implement their systems as required. Before buying a franchise, you need to understand what kind of support your franchisor is willing to give after you sign the contract and the training is over. Some franchisors are actively involved in their franchisees’ business to help them succeed, while others are more hands-off in their approach.
Consider how much support you are going to receive be it marketing or technical, to help you get started and grow. You are more likely to succeed if your franchisor provides some start-up assistance to make launching smoother for you. As such, find a franchisor that is willing to give you technical and/or marketing support such as helping you with your business plan or sharing their market research studies for your benefit.
8. Conflict Resolution
Like every other relationship, there may be conflicts or misunderstandings along the way between you and your franchisor. It is important that you find out what conflict resolution policies are in place for handling such situations. Get to know if your agreement allows you to sue or only seek mediation or private arbitration in case of disputes with your franchisor.
Also, look at who pays litigation fees in the event of a lawsuit. If you are not comfortable with the process of conflict resolution provided, you can always find other franchisors with better policies and guidelines.
If you are set on buying a franchise and need guidance on how to go about it, Franchise Logic is your reliable partner. Contact us today at 303-805-5078 to get a better understanding of your options!