Before You Invest in a Franchise: A Tutorial
For many, the choice to invest in a franchise business is an exciting, often life-changing one. Some people invest their entire savings to live out the American dream, so it is important to be informed. Like any major decision, research and education are imperative.
Business ownership through franchising is the equivalent of going into business for yourself but not by yourself. There is a sense of security knowing there are systems to follow and support available when you need it. All franchises are not created equally; here are some tips to check and double-check off your list before diving in with heart, soul, and life savings.
Before You Invest: Research
Do the basic homework first by researching the franchise business. How long have they been in operation? What’s the story behind its origins, meaning who started it and why? Do you agree with the mission statement or relate to the founder? Learn about the industry, the business and the people behind it.
Then, make your list for further education.
- Ask if you can shadow a franchisee or participate in “a day in the life” of the owner. This will help you determine if you like the business.
- 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.
- Validate! Speak to as many franchisees in the system as you can to find out what they like and dislike about the support and training they receive, both in the beginning and ongoing.
- 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.
- Put your reading glasses on. Make sure you read through all 23 items of the FDD (Franchise Disclosure Document) you have received; particularly be familiar with:
- Item 1: Company background and history, competition & regulation in the industry.
- Item 3: Litigation history for the last 10 years.
- Item 4: Bankruptcy history for the last 10 years.
- Item 5: Fees you will be paying franchisor and its affiliates upfront.
- Item 6: On-going fees you will pay the franchisor and its affiliates.
- Item 7: A chart that lists the likely costs to open the business that you will have in the first few months of operation (told in a range).
- Item 12: Territory description, review the territory description here and determine if the method of defining “Territory” will allow the franchisor to sell a territory to someone else, which will interfere with your business.
- Item 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. Retain an experienced business/franchise accountant to review the audited financials to determine if this franchisor is financially strong enough to support the system in place and the growth that is anticipated.
Visit our resources for more information regarding significant FDD items and provisions.
An Informed Decision is the Right Decision
Business ownership through franchising can be a rewarding endeavor that changes your personal and professional life forever. It’s worth a hard look beforehand. Dot your I’s and cross your Ts. As with any major crossroad, an informed decision is the right decision.
Are you ready to own a franchise? Call 215.525.1165 for a free initial consultation today.