How Not to Get Screwed Buying a Franchise

As a capital provider and exit planning advisor, I’ve helped several clients with review and analyze some national and regional brands to see if they’re worth buying or not.

Whether you’re working with an advisor or going it alone, here are 10 important strategies to ensure you make a good decision – including saying no.

• Understand the Business Model –

  Thoroughly understand the franchise’s business model. This includes the product or service it provides, its target audience, pricing structure, and overall market position.

• Read the Franchise Disclosure Document (FDD) –

  This is an extremely crucial document that you are legally provided to thoroughly understand the franchise system, its financials, legal issues, and obligations for both the franchisor and the franchisee. It also provides a list of current and past franchisees.

• Talk to Current and Former Franchisees –

  This can provide some of the most valuable insight into the reality of operating a franchise under this brand. Ask about their experiences, if they felt the parent company adequately supported them, if the reality matched their expectations and anything else you might be concerned about.

• Financial Performance –

  Take a close look at the financial performance of the franchise system. This includes both the franchisor’s overall performance and the financial performance of individual franchise units. A financial advisor can be a great help here.

• Initial and Ongoing Costs

Understand all the costs associated with the franchise, including initial investment, royalty fees, advertising fees, renewal fees, and any other costs detailed in the FDD. Ensure you have a clear idea of the total investment required.

• Franchisor Support –

Evaluate the level of support the franchisor provides. This can include training programs, marketing support, operational support, site selection, etc. The more support they provide, especially in areas where you may lack experience, the better.

• Legal Assistance –

  Consider hiring a franchise attorney to review your FDD and franchise agreement. This can help identify any potential red flags or concerns that you might not see.

• Market Research –

Look at the current market trends and the industry. If it’s a food franchise, for example, is the industry growing? What’s the competition like? It’s also important to understand the specific market dynamics of the location where you plan to operate your franchise.

• Exit Strategy –

Understand what happens if you want to sell your franchise or if things don’t work out. Are there any restrictions or financial penalties?

• Personal Fit –

Finally, make sure the business fits well with your interests, skills, and long-term goals.

Not all franchises are created equal.

Some may offer a great business opportunity, while others may not live up to their promises.

Do your due diligence, gather as much information as you can, and make sure to get professional advice before signing on the dotted line.

If you’re looking for working capital or a revolving line of credit for your business, you can apply here without affecting your personal or business credit.

Not sure if you should grow or sell your business? Attend a free webinar to pick up some tools and learn the basics of value acceleration.