3 Things You Should Know Before Buying A Franchise
Franchises are a popular option for would-be entrepreneurs for good reason – you get to hit the ground running with a business that starts with an established customer base and brand recognition.
But even with its benefits over starting a small business from scratch, it’s still a significant financial investment and a long-term commitment. This makes it crucial that your decision is a well-informed one.
“Read up, talk to friends and family, make lists, speak with business owners and franchise owners, but – most importantly – know that this is not a decision to make impulsively,” advises the Franchise Business Review, an independent market research firm that specializes in benchmarking franchisee satisfaction. “Be true to your instinct and what will be right for you, your goals and your mindset.”
Once you start perusing opportunities and are moving into decision mode, consider these 3 key issues before you buy a franchise:
Know The Downside
One of the main down sides of buying a franchise lies mainly in the loss of control you have as a business owner, since the franchisor makes a lot of the decisions for you, says Yamarie Grullon, director of content strategy at ShopKeep.
“Of course, some business owners consider this narrowing of control a relief and therefore an advantage,” she writes in a blog for the business mentor organization SCORE. “Also, the profits tend to be slightly lower than if you had your own business, because as a franchisee, you typically have to pay franchise fees to the franchisor.”
Be Aware of Bias in FDD
When considering a franchise investment, you’ll get to see the corporate Franchise Disclosure Document or FDD, to review. The document, filed annually by a franchise corporation, is packed full of information and could be hundreds of pages. It’s one of the things FDDs have in common, he adds.
“These documents are pretty long on purpose,” says attorney Richard Rosen, chairman of the New York State Franchise Bar Association in a story by Eric Rosenbaum for CNBC.
They’re on purpose, he says, to favor the franchise corporation over the prospective franchisee.
So Rosen advises to be cautious of that as you review a company’s FDD to assess the franchise investment.
Understand Your Territory
It’s imperative that you have a clear understanding of your franchise “territory” – every FDD should outline it, and it will be defined by a population size or physical distance.
“Knowing your territory is among the most important issues to understand before signing a franchise agreement,” Rosen says in the CNBC article. “If no territory is delineated, that can be one of the biggest red flags for a prospective franchisee.”
Franchisors will create territory guidelines to help protect you and other franchisees, to avoid disputes and maintain a healthy coverage of the business you’re buying.
“When you buy the franchise, you want to ensure that you won’t have someone in your area set up shop and cannibalize your efforts,” writes Susan Guillory, president of Egg Marketing & Communications, in a blog for Franchise Direct.
“Look closely at the territory you’d get with purchase and see if it’s in the right areas to help you drive a profit,” she writes.
Talk to Other Franchisees
Talking to other franchisees – current owners in the system – before you decide on a franchise investment is one of the most important steps in your research process.
“Reading isn’t enough,” says Rosen, the New York attorney in the CNBC story.
He recommends would-be entrepreneurs reach out to at least a dozen current owners of the franchise they’re considering. (Contact information for franchisees should be provided in the FDD.)
“It’s a thing that I tell every prospective franchisee that I represent,” he says.
Many franchisees are willing to talk to you because at one time they were once in their shoes – they were vetting the franchise opportunity with questions of their own. Questions to ask include how long they’ve been a franchisee and whether it’s been going as expected financially and in general terms.