If you’re ready to become a business owner without necessarily starting from scratch, franchise ownership may be suited for you. There are many opportunities when it comes to franchising as you’re able to reduce risk, enter into a turnkey operational model, and have a support system on all business mechanics like operations, financial, sales, marketing, and more. However, franchising is not for everyone and it’s important to understand the considerations as it relates to the franchise model. Here’s a complimentary checklist of questions and considerations to ask yourself before entering into your first franchise agreement:
How much money do you have to invest?
How much money can you afford to lose, especially during the ramp periods?
Are you looking to purchase the franchise alone or with partners?
Will you need financing and if so, where will you get it?
Do you need a specific minimum annual income?
How many hours can you work or are willing to work?
Skills and Experiences
Does the franchise require technical experience or special training or education?
What special skills can you bring to the franchise?
What experience do you have as a business owner or manager?
What are your reasons for buying a particular franchise?
Do you want to work in a particular field?
Do you intend to operate the business yourself or hire a manager from the beginning?
Will the franchise ownership be your main source of income or supplement to your current income?
Are you in this for the long term or do you have an exit strategy?
Are you willing to let the franchisor be your boss?
Franchise Due Diligence
How many franchised outlets are there?
What is the initial franchise fee? What are the additional start-up costs?
Are there continuing royalty payments? How much are they?
What management, technical and other support does the franchisor offer?
What controls does the franchisor impose?
How long has the franchisor been in business?
Does the franchisor provide onboarding and ramp period training and support?
How does the franchisor support marketing and lead generation efforts?
What are current franchisees saying about the franchisor?
Does the franchisor have a solid growth plan to scale franchisees?
After addressing those initial questions, make sure you obtain a copy of the franchisor’s Franchise Disclosure Document (FDD) before making the investment. While FDD language may vary, here are some points you’ll want to review:
What are the legal requirements for the franchise? Are there any special licenses or permits that need to be obtained, especially at your expense?
Is there litigation or bankruptcy history of the franchisor, its predecessor, or affiliates? Consider having an account review the required financial statements.
What are the initial startup costs? What are the ongoing costs just to maintain the franchise?
Grand opening promotions
Business and operating licenses
Product or service supply costs
Real estate or leasehold improvements
Required equipment or technology
Training and education
Compliance with local ordinances
What are the franchisor’s marketing plans? Will the franchisor get commission or rebate on advertisements? Do they have a ‘marketing fund’ as a percentage of revenue from all franchisees to create national advertising? If so, what is the percentage and where is it allocated?
What is the training plan for all employees received from the franchisor?
What are the renewal, termination, transfer, and dispute clauses?
Being a franchise owner has a wealth of pros and it’s important to conduct a full due diligence before making the commitment. There are many resources available to help support you on this journey including accountants/lawyers, banks and other financial institutions, the Better Business Bureau, and of course, the Federal Trade Commission. Here is a quick list of some resources to help:
The Federal Trade Commission’s Guide to Buying a Franchise
The International Franchising Association’s Franchising 101 Guide
The American Association of Franchisees and Dealers’ Road Map to Selecting a Franchise
Forbes article on How to Read a Franchise Disclosure Document
Looking for some advice on operational, financial, or marketing-related matters when it comes to franchising? 👋 Drop us a line at firstname.lastname@example.org.