Top 9 Tips for Buying A Franchise
Everyone is dreaming of starting their own business someday, somehow. For those wanting to be their own boss with everything that goes along with it, purchasing a franchise might be the right middle ground.
Franchising poses less of a risk when compared to starting a completely new thing. Building something of your own from the ground up can be a daunting task, especially if you are lacking the necessary knowledge, connections, and experience.
The franchisor does most of the work for you. The business plan is already set up, the brand has already been established, and advertising and marketing are taken care of. The risk of starting up a business is not completely negated but is reduced to a certain degree.
Which makes the goal of success easier but ultimately up to you. If purchasing a franchise is more of your thing, here are some pointers on how to acquire one best suited for you.
1. Research
Nothing can be as valuable as you being well-informed. The more you know about the world of franchises, the better. When you identify a potential opportunity in terms of acquiring the franchise right for you, the responsibility is yours to do due diligence before committing.
Make sure you do all the necessary research before actually investing your time, effort, and money. The FDD (Franchise Disclosure Document) contains all the necessary information.
Details about the company, legal, and financial history but also more immediate details like initial fees and obligations on your part are contained within.
As a franchisee, you need to be clear on what your obligations as the owner will be from now on out. Make sure to speak with already established franchisees on any and all details.
2. Self-assessment
The search for an adequate franchise starts with you and your inclinations. Do not fall into the trap of getting into a franchise based solely on favorable numbers and nothing else. If you do not resonate with the industry and niche in question, you will not like what you are doing and will, therefore, be unhappy with your choice.
Before getting into the dirty work of assessing different companies and opportunities, turn your attention more inwards. What is it that you would like to do? For how long? And what are your goals, both long and short-term?
How flexible are you with your working hours and how much of your time will you be able to dedicate to running the franchise? Coming up with answers to these questions will give you invaluable insight into what franchise opportunities you can objectively consider and make work.
No matter the combination of these variables, there is always a franchise out there for everyone. Look deep enough into the offer pool and yourself as well and you will find a franchise that suits your needs, goals, and lifestyle.
3. Costs of running a business
There are always many different costs that go into running a business of any kind. This goes for franchisees having to pay certain fees to franchisors. In turn, franchisees acquire the rights and assistance to the brand name. First of all, there is usually an initial franchise fee.
This expense is covered by you, the franchisee, to the franchisor for the right to start doing business. Depending on the brand and the type of contract you are signing, this initial price can vary greatly. The operational investments are the expenses you will need to cover in order for the business processes to commence and remain in operation.
These fees include but are not limited to real estate expenses, inventory, equipment, etc. Finally, there will be royalty fees that are calculated based on the gross income over a period of time. Usually weekly or monthly. Your contract will contain all the necessary data, which includes financial obligations.
Sometimes, you may be required to contribute to the advertising and marketing funds. These demands are usually put in place when there is a need for national or regional advertising for the brand in question. Be aware of all the expenses that will fall on your shoulders before actually committing.
This will give you insight into what is realistic and what is not. Extend too much and you may find yourself in way over your head. Underextend, and you may waste potential and not maximize your efforts. It is a delicate balancing act.
4. Buying a franchise
Make sure that you are the one deciding on signing the bottom line. Do not let someone sell you a franchise with flashy advertising and promotions. Franchisors are employing aggressive tactics to sell their franchises. Do not fall for these methods.
Do not get lured into signing a contract that is not to your liking. Weight in all the factors and compare different offers and opportunities. Be serious when exploring franchise options and make a list of adequate ones.
Evaluate every single one of them in great detail by yourself. Make another list of the issues to compare. Then confront the franchisors with these issues and do not settle for anything but a crystal clear answer.
Remember, you hold the purchasing power. You get to decide where to invest so make your choice the best one possible. Do not let others decide where your time, money, and effort go. You can find a great franchise for sale if you play it smart, so don’t worry.
5. Most common issues
In this section, we will go over the most common issues that may arise before purchasing a franchise. It is always better to address these beforehand. An ounce of prevention is more valuable than a pound of cure. The key term here is proactiveness.
Be proactive and deal with these issues before actually committing to a legally binding contract. First of all, be clear on the exclusivity rights. Meaning, can another franchise be established in the relevant proximity of your area? If this is the case, what are the regulations on proximity? We have covered the costs of doing business, but it is important to discern overt costs and hidden ones.
Make sure that all costs are covered and that you have not missed any fine print. All costs need to be properly disclosed before signing the dotted line. This way, the contract will protect you from any hidden expenses that you will be obligated to cover.
Pay special attention to the necessary contributions you need to make to the advertising budgets. Be aware of the terms and conditions for revoking the rights to the franchise. If for whatever reason you need to pull the plug on the entire deal, make sure to know exactly what your obligations would be.
Processes involved in franchise revocation should be clearly detailed. What portions, if any, are refundable if such an event would occur? Depending on the industry and niche you are willing to invest in, there may be many more specific questions you would want to ask.
Come up with a list of those questions and make sure you are satisfied with the answers. Your official and the legally binding contract should contain all the details to avoid any legal dispute in the future.
6. Professional consulting
The one thing we would always recommend is to print out a copy of the aforementioned FDD. Then, take it to an experienced and trustworthy legal professional for a review. This service will come with a price, but it is a crucial safety investment.
It may save you a ton of trouble and headache in the future. Attorneys will help you comprehend what you are getting into, what to expect, and what to look out for. The documents may include red flags that you may not notice.
These can only be pointed out by a professional who will answer any and all of your questions. Taxation is another complicated point of confusion for many would-be franchise investors.
There are professionals that specialize in franchise law who can go over your contracts and documents to make sure you are safe.
Accountants will make sure you understand and account for all the costs of acquiring and running such a business.
Comparing the scale of such an investment, hiring a professional to cover any and all eventualities is a minor expense that brings immense value. Do not skimp on this very important precaution.
7. Understanding the immediate market
The area you will run a franchise determines the success of your business. The customers are the defining factor if your franchise will stay afloat. Make sure that there is a high demand for your chosen business.
Not only that but make sure the demand is not already satisfied, making you compete with the competition. Ideally, you would satisfy a need for a given territory where there is no competition in sight.
This is rarely the case as you will always have a certain degree of healthy competition. But, make sure not to try and squeeze into an already overly-saturated market as it will not be feasible to try and come out on top. Inform yourself of any major issues concerning territory overlapping and boundaries.
Dig up how many territories the franchise already has, and if there are any available for sale. What are their plans for the future and can anyone else compete within your chosen territory? The market is becoming increasingly digitalized and online, make sure you are aware of any online sale rules and regulations.
In short, make sure that you are satisfying your customer’s needs without any negative feedback or trouble from the competition. It is always easier to satisfy a starving market as opposed to struggling in an over-saturated one.
8. The pros and cons of analysis
Make a list of the things that would be going for you versus the negatives of buying and running a franchise. Pros on the left and cons on the right side. The pros side might include, for example, an established brand in a proven and favorable market.
The right side should contain costs and liabilities like all the costs which we have covered already. What are the sums that you would need to invest in proper marketing and the share of royalties that needs to go to the franchisor? Also, think big.
Could you possibly open up your own thing and keep all the profit to yourself as opposed to paying royalties to a franchisor? It is a bold thought but one always worth looking into. Weight out the positives and the negatives.
If the former outweighs the latter, it just may be feasible to get things going. Mind though, the weighting can and should be done from two angles. Professionally and subjectively. The aforementioned professionals will help you with the former and you can answer the latter.
Make sure to cover both perspectives to get a complete picture of whether this endeavor is worth your while.
9. Putting in the work
No matter the choices you make, be prepared to work harder than you have ever worked before. Like any other business, running a franchise is hard work and will take a lot of knowledge, experience, time, and effort on your part in order to function.
It is these factors, when combined, that produce a franchise that is highly profitable and sustainable over the long term. Franchises are not a set it and forget it type of deal, they require constant work and supervision.
If you do not think you can make these investments over the first few years of running a franchise, consider other investment opportunities. Possibly something more passive that does not require constant investments in terms of time and effort.
Franchises are a profitable business model for a reason. We see franchises every single day without even realizing it. If you are an entrepreneur who is keen on using a tried and tested formula and scaling it to grow a business, then purchasing a franchise is for you.
Take it slowly, do not rush into anything that you may not be able to handle, and follow these rules and you will be on your way to running a successful business.
