Questions to ask before you buy a franchise

Before you look in detail at a particular franchise opportunity, assess the franchisor. The quality and capability of the franchisor has a huge role to play in the success of individual franchisees. 

Start by looking at:

• The history and track record of the franchise operation
• How long they have been in business
• If they have the resources and commitment to develop the whole franchise chain 
• If there are initiatives in progress. 

Competent operators should offer a disclosure document giving background information on the nature, financial health, and general viability of the franchisor. 

It’s not unheard of for a successful franchise development to be taken over by a larger corporation or conglomerate and then allowed to languish; or at least not driven with the same passion and enthusiasm as the franchise creator. Consider if this could happen to the franchise chain you’re interested in.

Beware of franchisors who:

• Pressure you to sign, settle, or pay a deposit now
• Threaten that you may lose the territory
• Require a substantial upfront fee from you. 

These are all danger signs that you may be dealing with an unscrupulous franchisor.

First-hand knowledge is incredibly valuable, so make sure you speak to other franchisees and get their experience and opinion of the franchisor. 

Some questions you could ask include:

• If their relationship with the franchisor was functional or dysfunctional, co-operative or confrontational? This will give you a good idea of what you’re in for. 
• Is there a franchise owners’ board or council with input into the franchisor’s decisions, or does the franchisor have absolute say?
• How well the franchisor supports franchisees in matters like ongoing support, marketing initiatives, efficient central administration, and group buying.
• If the franchise has lived up to their expectations in terms of sales revenue, and any non-monetary factors that are important to you (such as stability, access to learning opportunities, and overall satisfaction).

Franchisees’ answers to these questions will be telling. They’re the ones at the coalface, after all.

Always get a good lawyer, accountant, or adviser who specialises in the franchise industry to check out the deal before you sign a franchise agreement. It’s critical to seek expert advice on the following matters.

Confirm what territory or coverage you’re being offered. Is there a real market demand for the franchise in this area? As part of your due diligence, you should make sure you properly research market demand and pinpoint where the franchise is in its business life cycle, so you know whether the business is in an emerging, maturing, or declining industry. These are important factors if your franchise fee is based on future profits.

Check if the business has a proven track record. Yes, you can make big money being ‘in on the ground floor’ of an emerging business – but you can lose big money, too. One of the main points of buying a franchise is to reduce your risk of failure, whereas buying into an unproven franchise scheme eliminates this advantage.

No one goes into business thinking their business will fail. But it’s important to understand the circumstances in which your franchise could be taken off you – for example, do you have to meet certain sales figures to retain the franchise?

Take off your rose-tinted glasses and think carefully about how realistic the profit projections are for the franchise you want to buy. Ask the franchisor for the hard facts and market research to support any revenue or profit projections. Get outside advice from an accountant (and ideally existing franchise owners), so that you can be sure your optimism isn’t clouding your judgment.

It’s important to understand not only the upfront fee, but any ongoing fees or royalties you’ll have to pay the franchisor. In return, it should be clear what you’ll get for these fees in terms of things like training, marketing, promotions, and advertising.

Many agreements include a ‘cooling off’ period (say 14 days) in case you change your mind about the franchise. This can benefit both the franchisor and franchisee.

Most business owners are looking for opportunities to grow their business. This can be challenging if market demand is low, or if the market is saturated. The franchise’s position in the business life cycle will give you an indication of whether to expect new competition to enter your market. An emerging industry is likely to have more potential, but also sure to have many competitors. 

You’ll also want to know whether you have exclusive rights for that territory. If you don’t, you might find a competitor opening down the road – and eating into your customer base.

Many people become wealthy by owning multiple franchises. Do you have ‘first option’ rights to set up more franchises in your area if the business goes well?

To grow, you’ll need support – so find out what kind of ongoing support you’re likely to get from the franchisor. Will you get help with setting up a database of customers or clients? This could happen in various ways. For example:

• Through national advertising that provides the franchisor with a database of prospective customers who could be passed on to the franchisee.
• Existing franchisees in the area might have more customers than they can cope with and be willing to pass some of these on (some form of commission for these sales leads often applies).

As business owners who have ‘been there, done that’ in your industry, your fellow franchisees will be a critical means of support. Find out whether they meet regularly and if this network is somewhere you can go for help and advice.

Restrictions affect the way you do business, which means they can impact your success. Find out what the restrictions are and how they could impact you. For example, do you have to buy all your products or services through the franchisor, or can your source them on the open market? What are the pricing and quality policies?

You might also be restricted with when, or who you can sell the franchise to. Confirm whether you can sell the franchise at a later date, and whether you need to give the franchisor first option. If you can sell to an outside buyer, what qualifications must they have, if any? Will those requirements make the business harder to sell?