Franchising

When buying a franchise business there are a great number of things you should carefully consider in order to help you avoid some of the major pitfalls.

The following are just some of the steps you can use to limit the chances of buyers remorse. The point being, that if you pick the wrong franchise without due diligence you could be regretting the decision for a long time to come. I hope you find this useful.

- Use a franchise broker.

Franchise brokers work with several, in many cases hundreds, of franchises over dozens of different industries. The services of a franchise broker are free and do not add to the cost of the franchise. What a franchise broker does is to get to know you through a series of questions and then presents you with some possible franchises that you qualify for based on the answers to those questions. They also help you every step of the way with items such as where to find information in the Franchise Disclosure Document (FDD), what questions to ask when talking to the franchise and scheduling and planning a discovery with the franchise. The use of a franchise broker saves you time and aggravation and it helps the franchise find qualified candidates. It is truly a win-win situation for both the franchisor and the prospective franchisee.

- How does the economy affect the type of franchise you are considering?

What impact will a change in the economy have on the franchise or industry that you are considering? Typically non-essential service and luxury products will suffer more than essential items or services or those that offer some sort of cost savings.

- Is the franchise operation dependent on the owner or manager and would it be able to survive a change?

Some franchise operations succeed mostly due to the influence of the owner or the management team. How big of an impact would a change in this area cause if a change were to occur? Would the franchise model work regardless of who owned or operated the business? Depending on the franchise model some business are just as much about the people involved as the product or service they are providing. This is something to consider if you are planning on running the franchise for a few years and then selling it. You may not want a business model that will be dramatically affected due to change in ownership.

- Is the franchisor proactive in developing new business?

Part of the back office support for many franchises is marketing in an effort to get more business for their franchisees. In some cases, such as with some janitorial franchises, the franchisor will actively market a certain area with mail out's and phone calls in an effort to get business for a particular franchisor. This can be good and bad, as it can cost the franchisee a percentage of the contracted amount but at the same time it is a sales tool that helps grow their business. If you are considering a franchise model that actively gets business for you be sure to find out how the franchisor is paid for the marketing and how much they charge for this service. You have to make sure that the cost of getting the new business is not going to outweigh the money you make from that new business. This sounds logical but sometimes it's not as obvious as it seems until you sit down and run the numbers.

- What are the profit margins?

When you are looking at the financial projections for the business you will need to determine what the net profit will be after all of the franchisors fees are paid. There are two problems with trying to get a fairly accurate figure when looking at franchise opportunities. In the United States the Federal Trade Commission does not allow franchisors to make income claims. In other words, not only can they not tell you about what you can expect to make, but they cannot even give you figures that you may be able to use to determine your overhead and income to determine your profits. So, how are you supposed to find this information? When you request information from the franchisor they will send you what is called a Franchise Disclosure Document or FDD. In the FDD they do have projected high cost and projected low cost listed but as for projected income, you have to contact some of their franchisees. Now the income and fixed cost will vary from region to region but the franchise fees remain the same. Be sure to review all fees and charges that the franchisor charges in addition to their franchise fee, such as a marketing fee, accounting fees and so on. In the case of some companies they have a minimum that they charge even if you make no money, so be careful.

- A good franchisor will invite you for a "Discovery Day" at their franchise headquarters.

The discovery day is a chance for you to go to the main office of the franchise and meet the people behind the franchise. It also allows you the opportunity to see behind the scenes and see how they are run, ask questions and determine if this is the type of company you want to be associated with. In essence buying into a franchise is a lot like getting married. There has to be trust and you better like them because they are more than likely going to be with you for a while.

Please NOTE.This not an exhaustive list of the factors that make a good franchise, but should give you some key areas to look at. Take your time, take care and take advice.