Buying a franchise may be the biggest financial investment you ever make. When it works, you have the chance to own and operate your own business with the added advantage of a partnering with an established company with name recognition, a successful business model, and high quality products or services. But when it fails, you may find yourself trapped in a no-win situation with a poorly producing business and franchisor that is providing significantly less than promised. How do you make sure your franchise is a success? Use these 5 simple steps to guide your purchase:
1) Know Yourself-According to the International Franchise Association, franchised businesses provide nearly 18 million jobs and generate 1.2 trillion dollars annually. At the Bundy Law Firm, we have worked with franchisees from tutoring centers to tractor retailers and convenience stores to ice cream vendors. A prospective franchise buyer could easily be overwhelmed by the sheer number of possible franchises. Ask yourself what skills you bring. Extensive experience in hospitality? 10 years of home-building know how? An ability to work well with children? Make sure the franchise you are purchasing matches your unique skill set. Be wary of any business you know nothing about.
2) Know your Franchise-By now you’ve probably looked at franchise websites and spoken extensively to several franchise sales people, now it’s time to make sure the information you’ve been given matches the facts. Look at the Franchise Disclosure Document (FDD) carefully. The Federal Trade Commission requires all franchisors to provide an FDD 14 days prior to signing an agreement with you or accepting any money. The franchisor, among other things, must identify its executives and describe their business experience, disclose certain lawsuits or arbitrations provide a breakdown of initial and ongoing expenses and state the conditions for renewing, selling or terminating the franchise. The franchisor likely had an attorney draft the FDD to protect their interests; you should have an experienced franchise attorney review it to protect yours.
3) Trust But Verify– The Federal Trade Commission requires that the FDD include a list of current and former franchisees. These people are a great resource to verify the franchisor’s claims. Contact or visit franchisees in your area to chat about their experiences and to see first-hand the volume and type of business they’re doing. You should call every person on the “former franchisee” list and as many of the active franchisees as time permits. Do not bother talking to franchisees that the franchisor introduces you to or encourages you to contact. Beware of purchasing any franchise with a high number of terminated, cancelled or non-renewed franchises.
4) Crunch The Numbers-All franchises have some start up fees and even the best business might take a few months to turn a profit. Take a hard look how much you are willing to invest and how long you can wait before the business turns a profit. Don’t assume the “estimated initial investment” contained in the FDD will be enough to get you to profitability.
5) Call in the Professionals-In addition to carefully reviewing the FDD, you should have both the disclosure document and the franchise contract reviewed by an accountant and an experienced franchise attorney. An accountant can help you assess the franchise’s financial information and develop a successful business plan. An attorney can help you understand your rights and duties under the franchise agreement. An experienced franchise attorney will help you protect your interests and provide you with tools and knowledge to make a good business decision.