2.9.2012

Tips Before You Invest In A Franchise

What do you need to know before you invest in a franchise?  I always tell my prospective franchisee clients that they should find out as much as possible about the franchise and the business.  The following are some suggestions on questions to ask the franchisor and things to learn about the franchise before you invest in a franchise opportunity:

  1. Ask if you can work in one of the stores or spend a day with one of the franchisees to see if you like the business.
  2. Spend time with the franchisor – the franchisor/franchisee relationship is like a marriage – it lasts for many years and a good relationship between franchisor and franchisee is critical to a positive franchise experience.
  3. Ask how long the franchisor has been in this business and about the franchisor's experiences in running the business.
  4. Speak to as many franchisees in the system as you can to find out what they liked and disliked about the support and training they received.
  5. Speak to as many former franchisees as you can to find out why they left the system and what they liked and disliked about the support and training they received.
  6. Make sure that you read through all 23 items of the FDD (disclosure document) you have received; particularly be familiar with items 1 (company background and history, competition & regulation in the industry), 3 (litigation history for the last 10 years), 4 (bankruptcy history for the last 10 years), 5 (fees you will be paying franchisor and its affiliates upfront), 6 (on-going fees you will pay the franchisor and its affiliates), 7 (a chart that lists the likely costs to open the business and that you will have in the first few months of operation [told in a range]), 12 (territory description) and 20 (5 charts showing how many franchises are open and how many the franchisor intends to open).  Read the footnotes as well as the disclosure.
  7. Review the territory description in Item 12 and determine if the method of defining "Territory" will allow the franchisor to sell a territory to someone else which will end up hurting your business (see prior blog post on this topic).
  8. Retain an experienced business/franchise accountant to review the audited financials of the franchisor in light of Item 20 – is this franchisor financially strong enough to support the system in place and the growth that is anticipated.
Posted In: Franchising
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