When you’re buying a startup, there is a large amount of money at stake. Plus, there’s the fact that the success of your business could hinge on factors outside of your control. Therefore, when you’re starting a franchise, it’s important to know what you’re getting into when it comes to the parent company. That’s why it is vital that you know everything there is to know before you lay down a considerable amount of money.
Before buying a franchise, ask these questions to get a sense of what you’re getting involved with.
- What Type of Franchise Do You Want to Purchase?
The majority of franchises are what are known as package franchises. Package franchises are companies such as muffler chains, casual dining restaurants, or hotels that come with their business model that was created by its parent company. This startup model contains methods for dealing with everything from hiring guidelines to financial controls.
Another type of franchise is a product franchise. This type of company has businesses such as gas stations and car dealerships that only exist to sell the goods of the parent company. If you own a product franchise, you will probably have more control over how your company is run.
- Does Your Potential Company Fit Within the Franchise Model?
To take one example, casual dining restaurants get a lot of benefit from being associated with the name of the franchiser. But even if a franchisor is selling franchises, their model won’t always make sense. Before taking on a franchise, ask yourself, if you were a customer, would you use the services of the franchisee or would you be more likely go to an independent provider? If your answer is the latter, go with another type of franchise.
- What’s In The Disclosure Document?
In the United States, the Federal Trade Commission (FTC) requires all franchisors to give their potential franchisees what is known as a Franchise Disclosure Document. This document has basic but important information about the parent company. You will need to read this document thoroughly. It will have information about the company’s legal history, business experience, and even its other franchisees. In the event that your Franchise Disclosure Document contains information about other franchisees, contact a few of them and learn about their experience with the parent company.
- How Many Franchisees Does The Franchisor Work With?
If the parent company is already working with a large number of franchisees, this means that it is a profitable and successful company. However, you will want to be careful with locating a franchise too close to another franchisee. You don’t want to be in competition with the exact same kind of company. When you come in contact with the franchiser, ask them how they determine territories and if they clearly define them.
- What is the Franchise Fee That You Will Have to Pay?
This fee is the money that you will have to pay your franchisor for licensing rights. The majority of these types of fees are less than $40,000. But if you’re working with a large and popular national chain, you may end up paying much more.
- How Much Money Are You Going to Make With This Company?
This is one of the hardest questions to answer outright. For legal reasons, your franchiser isn’t going to give you projections. This is because the FTC has strict guidelines about how franchisers can present potential earnings to their franchisees. If you’re looking to buy into a particular franchise, speak to an accountant. They can talk with you about the potential of this opportunity. At this point, you will also want to talk to other franchisees about their earnings. Your Franchise Disclosure Document will tell you how to get in contact with them.
- Is the Franchisor Legitimate?
Unfortunately, some franchisors try to cheat new franchisees. To prevent this from happening, talk to other franchisees, the BBB and the Federal Trade Commission about the franchisor’s history and record.
One of the most important steps you can take is to work with a professional that has in-depth information about many franchises that can help you in your research and final choice.