When shopping for a new business, lots of first-timers choose a franchise for its many benefits, from a well-tested brand name and marketing program, as well as lots of back room support and training to help new business owners succeed.
But you have to do your due diligence to make sure you select the company that best matches your goals. When it comes to preparation, there are no short cuts. You have to read the fine print before signing any contracts.
The good news is that Federal Trade Commission requires franchise companies to disclose a great deal of information to help prospective franchisees learn everything they need to know to make a good choice.
You want to get a copy of the Franchise Disclosure Document for each franchise you’re seriously considering. Franchisors are required by law to provide you a copy at least 14 days before you’re asked to sign a contract or pay any money. You can ask for the document in any format convenient for you.
A franchise coach can help you through the nitty gritty of this process. As you begin your preliminary research, here’s what you should look for:
Franchisor’s Background
You want to know how long the franchisor has been in business. What’s the competition like? Pay close attention to the general business backgrounds of the company executives and how long they’ve been with the company.
Litigation history
Has the franchisor been involved in any litigation with their franchisees? Have any of its executives been convicted of fraud or other violations of franchise law? Have franchisees filed claims against the franchisor? You will also want to watch for any prior bankruptcies among the executives’ histories. These would all be red flags to further investigate.
Initial and Ongoing Costs
This is critical information since you never want to find yourself short on funds for matters that were clearly part of the cost of operating your business. Costs will include continuing royalty payments, advertising, business promotions, operating licenses, supply costs, cost to purchase discretionary equipment, cost of compliance with local municipal ordinances, and insurance, among others.
Only by estimating your costs can you realistically compare franchise operations to see if you might be able to earn more profit with another company.
Restrictions
Franchisors may restrict from whom you may order supplies, what you may offer for sale and where you can sell. Each franchisor will have different ways of determining a territory, which is meant to protect current franchisees but may not be satisfactory to you. For example, Dunkin’ Donuts has territorial restrictions limiting some franchisees from also offering 31 Flavors ice cream.
Training
While franchisors offer training, you need to know who is eligible for training and who pays. Are new employees eligible? Are support staff available for ongoing support? Again, make sure you know all the costs.
Advertising
Franchises often are asked to contribute a portion of their earnings for advertising. Get the details on what the franchisor requires. What percentage of the advertising budget is spent in your area? Will local advertising amount to extra out-of-pocket costs?
Current and Former Franchises
Plan on talking to as many current franchisees as possible. Ask them what you will need to do to succeed. Also talk to former franchisees to learn what went wrong for them. Make sure you also ask financial questions, such as their total investment, including unexpected costs and how long it took them to cover their initial investment and earn a reasonable income. What are their earnings? Franchisees’ income might vary quite a bit, depending on geographic area and other factors.
Financial History
You want to make sure the franchise company is financially stable since you certainly don’t want the company to go out of business just after you invested your money. You also want to ensure the franchisor has sufficient money to supporting its franchise system.
For more information, check out the FTC’s website, which has published a consumer guide to buying a franchise at http://www.business.ftc.gov/documents/inv05-buying-franchise-consumer-guide.
With a thorough due diligence, you can feel confident your new business will succeed for the long term.
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Contact Dan Citrenbaum to help you create the career you’ve always wanted. As a franchise coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at dcitrenbaum@gmail.com or at (484) 278-4589.
© Dan Citrenbaum 2016
This guest post is by Dan Citrenbaum, a Franchise Coach and Entrepreneurial Consultant who helps people achieve their dreams as small business owners. Find Dan at www.EnterpreneurOption.com.