Essential Steps to Prepare for Purchasing a Business Franchise: An Overview
Researching a Franchise Before Buying: A Comprehensive Guide
Making an informed decision when considering a franchise is crucial to avoiding costly mistakes. Here's a step-by-step guide on how to research a franchise effectively:
- Investigate Growth Potential and Market Fit Delve deeper than just websites or marketing materials. Assess the franchise's potential for success in your target market by considering factors such as initial investment, ongoing fees, staffing needs, marketing requirements, and local demand. Treat this stage like a detective work—ask detailed and tough questions to uncover any hidden challenges or limitations.
- Check with Consumer or Franchise Regulators Verify the legitimacy and regulatory compliance of the franchise. Contact consumer protection agencies or franchise regulators to inquire about any complaints, disputes, or legal actions involving the franchisor. This step helps you avoid problematic franchises that might have histories of abuse, misrepresentation, or poor franchisee support.
- Obtain and Study the Franchise Disclosure Document (FDD) Franchisors are required by law to provide the FDD at least 14 days before you sign any franchise agreement. The FDD is a comprehensive legal document detailing franchise fees, contractual obligations, franchisor support, territory rights, training, marketing requirements, and termination clauses. Thoroughly reviewing this document is essential to understanding what you are committing to. It’s highly advisable to have an experienced franchise business attorney review the FDD and franchise agreement to identify any red flags or unfavorable terms.
- Interview Current and Former Franchisees Engage with multiple current and some former franchisees to get candid insights about the franchise’s operational realities, support levels, earning potential, and challenges. Current franchisees can reveal how well the franchisor supports marketing, training, and problem resolution. Former franchisees may provide valuable warnings about reasons for leaving, losses, or contractual disputes. Compare these accounts with the information in the FDD and your own market research.
- Consult Experts and Perform Due Diligence Given the complexity of franchise agreements, consult franchise consultants or attorneys experienced in franchising. They can guide you through financial analyses, legal interpretation, and strategic fit evaluation. This expert guidance minimizes the risk involved in making a long-term investment decision.
In addition to the above steps, consider the following recommendations:
- Checking with the Better Business Bureau for complaints against the company is advised.
- Interviewing current franchisees for a sample is beneficial to determine store profitability and typical day-to-day operations.
- Contacting former franchisees can provide insights into reasons for termination.
- Investigating industries with the most growth potential is recommended before deciding on franchising.
- Going online to look up all articles about the companies you're considering and checking out the brand name's franchise listings is advised.
- Consumer or franchise regulators in your state should be checked for any serious problems with the company you're considering.
- Any reputable franchise company will provide information at no cost when asked.
Lastly, a week of on-site work in a franchise unit is recommended, and the decision between two equally sound franchises often comes down to gut instinct.
- The growth potential and market fit of a franchise should be thoroughly investigated, going beyond what is presented on websites or in marketing materials.
- To ensure the franchise is legitimate and in compliance with regulations, inquire with consumer protection agencies or franchise regulators about any complaints, disputes, or legal actions involving the franchisor.
- The Franchise Disclosure Document (FDD) is a crucial legal document that franchisors are obligated to provide; reviewing it and having an experienced franchise attorney review it is essential.
- Interviewing current and former franchisees provides insights into operational realities, support levels, earning potential, and challenges, helping in making an informed decision.
- Consulting experts, including franchise consultants or attorneys, and conducting due diligence helps minimize the risks involved in making a long-term investment decision.
- Checking with the Better Business Bureau for complaints, interviewing current franchisees for insights into store profitability, contacting former franchisees for reasons behind termination, and investigating industries with the most growth potential are recommended practices.
- Researching online for articles about the company, checking out brand name's franchise listings, and staying informed about any issues with the company by checking with consumer or franchise regulators in your state are essential.
- A week of on-site work in a franchise unit and relying on gut instinct often play a significant role in choosing between equally sound franchises.
