Vetting Potential Franchises: 4 Questions to Ask Before You Buy In
When you buy into a franchise, you get more than a business—you also get a business partner. As a franchisee, this should be a good fit for you personally. And, the franchisor should add as much value as you do. But how will you know this before you sign a contract? Use the following vetting questions to choose the right franchise.
When you buy into a franchise, you get more than a business—you also get a business partner.
As a franchisee, this should be a good fit for you personally. And, the franchisor should add as much value as you do. But how will you know this before you sign a contract? Use the following vetting questions to choose the right franchise.
Determining a franchise’s compatibility with your lifestyle and goals should be your number one consideration. If it’s not a good match, your new venture could be doomed from the start.
First, think about the number of hours you want to work each week. Are you looking for a full-time job, or do you prefer to be an absentee owner? Is the franchise seasonal? If so, will it require more hours of you at a certain time of year? Gauge the franchise’s travel requirements, too. If you despise travel, you won’t be happy owning a business that requires regular out-of-state trips. This should help narrow down your list of prospective franchises right away.
Think about how long you want to be in the business. Say you buy into a franchise concept at $500,000, and the business cash flow nets you $15,000 to $75,000 per year. Considering your principal and interest payment, it could take you ten years or more to see a return on your investment, even if you worked full-time in the business. Ask yourself: Are you willing to stick with this franchise—and with a full-time work schedule—for that long? (Note: Ideally, you should see ROI within four years of owning a franchise.)
You also want to think about the type of enterprise you want to associate yourself with. If you’re a vegetarian, for instance, you might have a hard time owning a burger franchise. Find a business—and a brand—you can get behind 100 percent.
If you only talk to the franchisor, you’re only going to hear the positive. For this reason, give other franchisees a call (make sure they are current owners who are actively involved in their franchise). Ask each one what it’s like to work with the franchisor. You might want to ask questions like, “Does the franchisor visit your space very often?” If you’re accustomed to doing things on your own, you may not appreciate a helicopter boss. Franchisees can offer insight into the type of employees you’ll need, what to look for in a potential site, potential obstacles you may face, and more.
Each franchisor will have a Franchise Disclosure Document, or FDD, that gives background information on the franchisor and its franchise locations. It also spells out the agreement and requirements such as investments, payback timeframes, location, and build-out specifications. Think of it as the fine print. Unfortunately these documents can easily reach 500 pages. But that’s no excuse for not studying it carefully.
For this, it’s wise to bring in your banker, accountant, and attorney so they can help you understand the FDD’s requirements and point out any red flags. This is the time to do your due diligence.
- Do I have enough money to make this work?
- Will this franchise be a viable investment if the economy slows?
- Am I going to have to purchase a building or rent space?
If the franchise doesn’t work out like you had hoped, will you be able to get out of it? The FDD may spell this out, and your accountant and business valuation advisors can help you put a plan in place. Of course, you may not have an exit strategy for, say, a $10,000 buy-in because you won’t be able to sell it. But for a $1 million investment? You should absolutely have an exit strategy.
Never rush your decision.
It’s easy to get swept up in a franchisor’s promises, but it’s wise to avoid a spur-of-the-moment deal. Instead, take time to run the numbers on a potential franchise to determine your ROI and its compatibility with your lifestyle and goals. While the FDD will give you a pro forma (i.e., financial statement and projections), be sure to also run your own. Don’t forget to request quotes from a few different franchises, so you can create projections as well. Your accountant can do this for you, of course.
Asking the right questions, taking a close look at current and future numbers, and leaning on a team of experienced advisors can save you time, money, and headaches when evaluating potential franchises. With careful vetting, you can determine whether a franchise—and its franchisor—will truly be a good business partner for you.