What to Consider Before Buying a Franchise Business
Share Article | May 3, 2010 Susan Brown
Purchasing a franchise is a big commitment of time, money, and energy. What should franchisees look for if they want to buy a franchise?
Buying a franchise is a decision that should be made carefully. Starting a franchise business often involves a considerable investment of time, energy, and money, and there are numerous fly-by-night operations that promise the world, but in the end fail to deliver. As such, prospective franchisees should exercise their full due diligence before entering into a contract with any franchise operation and learn how to pick the good franchise opportunities from the bad ones.
The following is a brief checklist of what franchisees should consider before entering a contract with a prospective franchise operation.
The Franchises Worth Buying are Those that can Prove their Profitability
The first thing a would be franchise owner should look into is the franchise operation's background and business model. There are several areas to consider:
Is the Franchise Disclosure Document (FDD) clear, thorough, and accurate? The FDD is one of the most important documents a prospective franchisee will have. By law, all franchise and business opportunity sellers must provide to prospective purchasers with a Franchise Disclosure Document (FDD). The franchisor must provide specific information about its operations to help the would-be franchisee decide whether or not to work with the company. This information should include, the obligations of the franchisor, actual, average, projected or forecasted franchise sales, profits or earnings, and recent financial statements. Since first time franchisees may not know what to look for in such a document, it is advisable to hire a qualified franchise attorney.
Does the prospective franchisor have a good background and reputation? Has the franchise operated successfully within several different locations for at least 3-5 years? Is there a solid business model that is both doable and potentially profitable?
Who makes up the management team? Does the management team behind the franchise business have the experience and know how to run a successful franchise operation?
How much support and communication exists between the franchisor and the franchisee? Does the franchisor provide any training to new franchisees? Will it provide any further assistance and support?
What is the industry as a whole look like? Is there growth potential within the industry being considered? What are the current economic trends?
Buying a Franchise is a Big Investment
Prospective franchisees should be very clear about what will be expected of them should they chose to open a business with a particular franchise operation:
What are the start-up and operational costs associated with purchasing this franchise? The expenses associated with renting, leasing, or owning a commercial property can get very high and the financial obligation is typically binding for several years. Franchisees should be clear about thekind of area, they will need to operate the business. They also need to consider any needed equipment, employees, and supplies. Franchisees should make sure they have the financial means to buy into a franchise, expand, or renovate.
What is the expected investment of time per week, and what is the projected level of income? This is an extremely important factor to consider when looking into purchasing a franchise business. Even a franchise operation that offers a well-known brand name and a comprehensive support system, will still require a lot of effort on the owner's part to open and operate, and a considerable amount of time may pass before the owner breaks even on the investment. This holds even more true for a lesser known brand, with weaker support.
In short, prospective franchisees need to invest time and care before buying a franchise business so that the precious time, energy, and money that will be committed will more likely provide an adequate return in the end.
Read more at Suite101: What to Consider Before Buying a Franchise Business http://entrepreneurs.suite101.com/article.cfm/what-to-consider-before-buying-a-franchise-business#ixzz0nUVuj0v4