Ask These 8 Questions Before Buying A Franchise

Running your own business can seem like an exciting venture, but building it from scratch isn’t always a realistic option. Some entrepreneurs opt to purchase a franchise instead.

Did you know? 10% of all businesses in the U.S. are franchises.

Franchising is a novel business structure, where a company (the franchisor), will license out their brand, operations and offerings for a fee. It’s a popular choice for starting your own business today, especially in industries where competition is fierce.

Like any important purchase, the best way to approach a franchise purchase is to make well-informed decisions. If you’re considering buying a franchise, be sure to find answers to these 8 questions first.

What is the investment required for a new franchise?

Typical investments for a new franchise can range anywhere from $50,000 to $1,000,000. It largely depends on the scale of the franchisor’s brand, their growth goals, and other factors such as location, industry, and even popularity.

Knowing the full investment requirements of a new franchise allows you to evaluate if you have enough capital or need to secure financing. This helps you plan accordingly and avoid underestimating the costs.

Always have investment numbers in writing. It’s the franchisor’s responsibility to inform you of any and all costs to open, operate, and mantain your franchise location. It’s the franchisees responsibility to do due diligence, and ensure that they can financially meet the requirements, without having to make substantial sacrifices in their existing business ventures or personal life.

Compare options and other franchise opportunities side by side, choosing the best one that fits your budget and personal goals.

Keep in mind that a high initial investment could indicate a well-established brand, but it doesn’t imply that. The reverse is also true—a low initial investment doesn’t necessarily imply that you’re getting a great deal. Always do your research.

Failing to understand the full financial committment can lead to undercapitalization, which is one of the top reasons for franchise failure in the U.S. Ask about the investment, understand your own financial condition, and ensure you’re ready to move forward with an opportunity that you can afford and succeed in.

How do I make money as the franchisee?

Nobody wants to run a business that isn’t profitable.

If this information isn’t already provided to you, ask the franchisor how you’re expected, as a franchisee, to make profits. What is the business model?

Knowing how revenue flows in allows to you fairly evaluate if the franchise’s business model aligns with your expectations and capabilities. You might also find it useful to see typical revenue sources for existing franchisees, their profit margins, and earning potential. The franchisor doesn’t have to provide all of this for you, but it never hurts to ask.

Request that the franchisor explains what market factors, if any, affect franchisee profitability.

Ask about typical franchisee benchmarks to compare against as you operate the new business. This allows you to guage if you’re performing at, above or below what’s expected (at any given time).

What is the franchisor’s reputability?

Long story short, a company with a troubled history raises red flags.

While they’re not an immediate disqualifier, you should base your purchase decision on the reputability and trust factor of the franchisor at all times.

Good signs that a franchisor is reputable and trustworthy:

• They have a proven operating system and are spoken highly of
• They have a long-established brand that’s credible and appealing
• They offer support and training, alongside your purchasing costs

Another way to judge the reputability of a franchise is to do your own research, and find key information on how they’ve grown and developed as a company. Be on the lookout for any past legal issues, including lawsuits, violations, or disputes.

What kind of training and support is given to new franchise owners?

This question gets you straight to the fundamental value proposition of the franchise opportunity. There should be some form of knowledge transfer, especially if you’re brand new to the industry.

Quality franchisor’s understand that investing in a new owner requires training in place—if the franchisees are profitable, they are too. Keep this question at the top of your mind throughout the whole purchasing process.

The goal is expose resoureces that will be available to you, as well as any operational skills that you’ll need to learn and develop on your own.

Considering a new franchise with no prior industry experience?

Don’t count yourself out. Explore options with the franchisor to determine if they provide direct industry training. Just because you don’t fit all of the requirements, doesn’t mean you’re unable to learn new skills or adapt quickly.

How do I market my new franchise location?

Customer acquisition is job #1 for new franchisees.

Sustainable revenue and profits rely on a steady influx of new customers walking through the door, whether it’s a physical location or digital store. This is why understandings the franchisor’s marketing training, tools, ad plans, and overall commitment to localized marketing support is critical in the evaluation process.

Even the most established, reputable brands need marketing in place for local franchise sites. National television ads and corporate marketing will only take you so far. Local marketing plans should be available, encompassing digital tactics like email communications, local SEO, social media, review generation, events, and more.

Franchisors that provide comprehensive marketing support for their franchisees historically perform better, plain and simple.

Don’t shortchange this key area of due diligence – your ability to bring in new business through marketing is paramount.

What is the success rate of existing franchisees in the system?

There’s no substitute for getting a transparent view on current franchisee performance; average revenues, net profits, cash flow, closure rates. These hard numbers provide legitimate insights that marketing claims from the franchisor simply cannot.

Ask this question, and make sure you have a clear understanding of what below, on and above average performance looks like in the context of a franchise owner. You might also want to push for visibility into factors like owner satisfaction, regional dynamics and other variables that might impact your performance.

To complement hard numbers you find, insist on connecting with any and all existing franchise owners. Categorize them into various performance segments – top performers, average earners and even underperformers (granted this information is made available to you). Learning directly from existing franchise owners will reveal the successes and challenges ahead.

(And potentially some unvarnished truths.)

What are the rules, and how do I stay compliant?

From brand guidelines to approved suppliers, you must comply with a codified set of rules for any new franchise opportunity. One of the core value propositions of a franchise is the cohesive brand experience that’s delivered across all locations. There will likely be strict guidelines around logo use, trademarks, marketing messaging, and even how you interact with your new customers.

It’s important to understand that rules are important for the franchisor – don’t look at them as restrictions on your freedom or operation. They’ve spent years and hard-earned money building their business to where it is today. In the context of due diligence, don’t undermine the franchise’s equity.

Check to see what the approved vendors are, ingredients, products, equipment—this can vary widely depending on the industry. These mandates create quality control and cost efficiencies as well.

However, they also impact profitability models. Franchisees must factor compliance costs into their financial projections.

What does the legal agreement look like?

At the heart of every franchisee-franchisor relationship is the Franchise Disclosure Document, or the FDD. This legally defines the rules of your engagement. Carefully reviewing this document with an attorney is recommended. It’s critical that you understand fees, supplier policies, renewal provisions, termination clasues, and other legal compliance requirements before signing anything.

As you explore franchise opportunities, press the franchisors for transparency into all rules, policies and compliances. Fully understanding and abiding by these drives system standardization and protects the franchise’s brand value for everyone involved.

Looking for a new franchise opportunity?

Tradebank is an innovative trading platform for thousands of business owners across the U.S. and Canada. With over 15+ franchised locations and 35 years in business, we have the tools, talent and infrastructure to support you with your next business venture. Check out our own franchising program, where you can innovate commerce within your local communities and build multiple revenue streams.