What to Know Before Buying a Franchise: Everything to Know
What to know before buying a franchise involves asking yourself if you are comfortable with the extent of control you will have over modifying operations.3 min read
What to know before buying a franchise involves asking yourself if you are comfortable with the extent of control you will have over modifying operations. If you like to experiment, be creative, and follow your own rules, investing in a franchise is probably not for you.
What You Need to Know Before Buying a Franchise
You will need to know the total investment required to get the franchise operating. The investment amount should include the purchase cost, inventory necessary to get started, and how much working capital is needed before the business breaks even. You will also need to know how the business will be financed. Other costs include:
- Franchise fees
- Marketing costs
- Training fees
- Local and state taxes
When calculating costs, it is best that you have the capital to cover business expenses for at least six months and personal living expenses for at least a year.
Things to Know
Know what you're good at and what will keep you motivated. The key to a successful franchise depends on how well you work "on" the business itself versus just working "in" the business.
As a franchise owner, you will most likely be the person dealing with employees. You will need to have good management skills to know how to inspire and motivate your employees. You will also need to have a skill set for handling customers and maintaining customer satisfaction.
If you are someone who thrives on operating in a regulated system and following established rules, a franchise is a good choice, as you must be comfortable with things you will not be allowed to change. Experience is important, as well. For example, if you want to invest in a chain restaurant, a food service or management background is essential.
The Federal Trade Commission's guide estimates it may take a year for a franchise to become profitable.
Things to Do
A costly error can be avoided if you realize it would be a mistake to buy a franchise when you are not suited to be in that role or are not compatible with the business.
A good resource for finding information is The Federal Trade Commission's Guide to Buying a Franchise. Two additional resources are the franchising 101 guide, available from the International Franchising Association, and the Road Map to Selecting a Franchise, available from The American Association of Franchisees and Dealers.
You will need to do research on the franchisor to gain an understanding of how long the company has been operating, its success rate, and how long franchisees typically stay in business. It is also important to know how much support the franchisor will offer if you need help. Having the franchisor's support can help make things run easier.
You should also ask what systems come with the franchise. This includes how the payroll is processed, marketing and upselling techniques, client services, and systems training.
Talk to other franchisees about their set up, success stories, and any problems they have had or are experiencing. Do not just talk to successful franchisees. You need to hear from both sides. Ask questions such as:
- What factors did they find that led to success?
- What were their main challenges, and how did they resolve them?
- Knowing what they now know, what would they do differently?
- For franchisees who failed, what factors made that happen?
- What was the timeframe for their business to show a profit?
- Would they do it again?
Have an exit strategy in place before you get started. Whether you plan to stay in for the long haul, sell at some point, or run the franchise for a couple of years, you need to know your end game. This will help you choose the right franchise to fit your objectives.
The Benefit and Drawbacks of Opening a Franchise
Consider the pros and cons of a franchise to help decide if this type of business could be profitable for you.
- Established brand
- Proven market
- Staffing guidelines
- Food franchises get recipes
- Store layout and design
- Franchise fee
- Marketing costs
- Merchandise mark-ups
Finally, consider whether hiring a consultant to guide you through opening your own business would be more beneficial than investing in a franchise.
If you need help with buying a franchise, you can post your legal need on UpCounsel's marketplace. Upcounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.