How to Buy a Franchise
The goal that any business owner dreams of is to build a profitable and recognizable business. What many do not consider, however, is that each person possesses the ability to jump into a business whose brand and recognition has already been built up for them, sparing them countless dollars and immeasurable amounts of effort. The decision to buy a franchise can be one that drastically changes your life for the better. In order to do so, however, it is crucial to weigh out all of your options every step of the way to ensure you are on the right path towards success.
Begin by finding a specialty that interests you the most. Franchises are available in nearly any field you consider fascinating; whether it be something comfortable you already have years of experience in, or something new and exciting to dip your toes into.
Once you have decided on a field, it’s time to become familiar with the concept you are leaping into. It is essential to do enough research and due diligence to determine if similar businesses in your field of choice are profitable and in demand in your area. For instance, a person with a natural knack for fitness and health may consider a business in the field of exercise, such as a gym, unless research finds that 3 local gyms have gone out of business in the past year. In this case, this entrepreneur may find something in the health food industry may be more rewarding.
Narrow Down a Franchise Business Opportunity
After a decision has been made on the best field in which to pursue your new and exciting franchise venture, you should begin to research precisely which franchise within that specialty appears to be most suitable for you. Search through lists of available franchises with our easy to use Find a Franchise tool. This step of the process is particularly important, given that you are determining which company is better fit to guide you towards ultimate success.
Like any business investment, it is fundamental to be familiar with exactly what you are getting yourself into. Do adequate research with respect to each and every company you consider, and request information from the company directly to become better acquainted with their business model. When speaking to the sales representative for a potential business option, be sure to ask all relevant information in order to thoroughly understand the business, its advantages, disadvantages, and risks.
Franchise Disclosure Document (FDD)
When buying a franchise, the company’s franchise disclosure document, or FDD, will be your holy grail. This document is the equivalent of a Hollywood tabloid magazine. A lot of the time, the subject at hand may not necessarily want the information enclosed to be public knowledge, but the choice is not theirs to make and it may determine the level of support or endorsement they receive from the reader. Unlike a gossip magazine, however, you can rely on an FDD for factual information that can educate you significantly on your decision. The FDD is a document that unveils all kinds of information that happens behind the scenes of each business. If it isn’t offered to you, request it.
Once the FDD is in your possession, read through every detail and consider just how wise it would be to invest in a company with its given track record. Highlight anything you may not understand or any questionable information. Although it is important to read each detail, pay specific attention to the following information:
- Make a note of the owner or founder’s background (found in item 2).
- Look out for prior litigations the company has had against its franchisees or outside vendors (found in item 3).
- Check for previous personal bankruptcies filed by the company’s founders (found in item 4).
- Examine all ongoing fees requested by the franchisor while you operate your business, such as general funds for brand marketing and advertising (found in item 6).
- Review and analyze the startup cost for this business in detail (a specific table should be found in item 7). Make sure the overall cost accounts for a sufficient amount of cash on hand. You should ensure you have at least 3 months worth of cash to run your business before it becomes profitable.
- It is wise to carefully evaluate the financial performance of the company’s already existing locations (found in item 19). Use these numbers to find the average performance of prior locations and the percentage of franchises that perform below average.
- Pay extra attention to the tables that demonstrate the growth and failure of the franchise system (found in item 20). This proves how many locations have been opened, closed, or terminated in the past 3 years.
Finally, and perhaps the most crucial piece of information to analyze is the company’s audited financial statements. Typically, franchisors disclose their income statement and balance sheet for the past 3 years of their operation. This is a good indicator of the financial health of the franchise system.
Talk to Several Franchisees
Before you proceed to the final step of commitment to buying a franchise, be sure to contact as many current and past franchisees of the company you have in mind as possible. Ask them any questions you may have about their experience with the company, its employees, the support they received, and overall process they endured to achieve essential attainment. Other franchisees will provide you with honest and genuine information, based solely on their own experience. Keep in mind these franchisees were once in your position, so they are often compelled to provide you with the inside scoop on the company of your choice. Franchisees contact information must be disclosed in the franchisor’s FDD.
Contact Franchise Creator
A thorough review and attentiveness to detail before you dive in will ensure that you will have a long and prosperous franchise experience.
Franchising can be a long and complex process, but you don’t have to go through it on your own! Franchise Creator has helped countless franchisees start and grow successful businesses across dozens of industries. We simplify, rationalize and hand you the resources you need to find ultimate success.
For more information, contact our team today.