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4 Questions to Ask Before Investing in a Franchise

Buying or Selling Your Business / Starting Your Business / Unexpected Business Risks

If you’ve always dreamed of starting your own business, but find the idea of building an entire operation from scratch too daunting, you might consider investing in a franchise.

Since you’re getting an already proven business model and brand, purchasing a franchise can make the start-up phase quite a bit easier. In addition to getting a well-known brand name, most franchises also come with turnkey operating systems, extensive training programs, and ongoing support from the franchisor.

Though franchises have a lot of advantages, they also come with their own unique drawbacks, and they aren’t a good fit for everyone. It’s vital to do your homework and thoroughly research the franchise before finalizing the deal.

Before buying a franchise, you should answer the following four questions to ensure the business arrangement is worth the investment and is a suitable fit for your particular needs and temperament.

1. What’s the true cost of the franchise?
Unlike starting your own business, where all of the capital you invest goes directly to support your operations, a major portion of your initial investment in a franchise goes to the franchisor for licensing rights, training, and equipment. To determine the true cost of the franchise, carefully review the Franchise Disclosure Document (FDD), which franchisors are required to provide you with before signing the franchise agreement.

These agreements often contain hidden costs in addition to the start-up costs and royalty payments, such as fees for training, marketing, and special promotions you’ll be required to offer. Because FDDs can be hundreds of pages long and include confusing terms and legalease, allow us to review it with you to ensure the deal is sound, worth the investment, and that you understand all the fine print.

2. What kind of systems and training are offered?
One of the biggest benefits of investing in a franchise is that you’re buying a proven business concept. But not all franchises are equal, so make sure your franchise comes with sound systems for everything needed to run the operation on a daily basis, from inventory and equipment to marketing and payroll.

What’s more, the franchise should come with ample training and ongoing support to ensure you’ll be able to master these systems with minimal headaches. With the proper systems, training, and support, your chances for business success can be greatly increased.

3. What kind of restrictions are imposed?
One of the major drawbacks of franchises are the level of control and restrictions imposed by the franchisor. Most require franchisees to follow strict guidelines and standards for things like pricing, product offerings, operational hours, and store design.

Oftentimes, you won’t be allowed to veer from these rules and do things your own way, such as trying new marketing strategies or varying product offerings. Even though you may be the boss of your franchise, the franchisor typically maintains a significant level of control. Given this, you’ll need to determine if you’re comfortable abiding by such a restrictive arrangement.

4. What kind of market potential and competition exists in your location?
Before choosing a franchise, consider the local market and customer demographic. Determine what the local clientele and market will support both now and in the future. Also research any potential competitors already doing business in the area.

You may find that there are already fellow franchisees operating in the vicinity. Some franchisors offer exclusive territory, while others don’t. And don’t just consider your geographic competition. Also determine whether the franchisor is allowed to sell products on its own to local stores or via other distribution channels, setting itself up as your potential competitor.

Some of the most reputable franchisors will help buyers do market research and select the best location for their store, while others will even assist with lease negotiations. Although owning a franchise will provide you with some built-in product recognition and customer loyalty during the start-up phase, it’s vital that you research the market to ensure demand for your product or service will survive the long haul.

Consult with us before sealing the deal
Investing in a well-known franchise can seem like a sure-fire way to own a wildly successful company. But no business opportunity is without its risks and downsides. Don’t let your lofty expectations and excitement keep you from doing the proper research and planning.  

A Family Business Lawyer® can help you review the franchise agreement to make sure you’re getting the best deal possible and are aware of all hidden costs and restrictions. They can also help you review the franchisor’s legal terms related to contract termination, contract renewal, and conflict resolution to ensure you’re not setting yourself up for a raw deal. Contact a Family Business Lawyer™ today to schedule a consultation.

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