Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, likely competition, the franchiser’s background, and the level of support you will receive. Evaluate franchise opportunities for your benefit.
Is there a demand for the franchiser’s products or services in your community? Is the demand seasonal? For example, lawn and garden care or swimming pool maintenance may be profitable only in the spring or summer. Is there likely to be a continuing demand for the products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service generate repeat business?
What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the franchiser have in your area? How many competing companies sell the same or similar products or services? Are these competing companies well established, with wide name recognition in your community? Do they offer the same goods and services at the same or lower price?
Your Ability to Operate the Business
Sometimes, franchise systems fail. Will you be able to operate your outlet even if the franchiser goes out of business? Will you need the franchiser’s ongoing training, advertising, or other assistance to succeed? Will you have access to the same or other suppliers? Could you conduct the business alone if you must lay off personnel to cut costs?
A primary reason for purchasing a franchise is the right to associate with the company’s name. The more widely recognized the name, the more likely it will draw customers who know its products or services.
Training and Support Services
Another reason for purchasing a franchise is to obtain support from the franchisor. What training and ongoing support does the franchiser provide? How does their training compare with the training for typical workers in the industry? What backgrounds do the current franchise owners have? Do you have a similar background?
Many franchisers operate well-established companies with years of experience both in selling goods or services and in managing a franchise system. Some franchisers started by operating their own business. Consider how long the franchiser has managed a franchise system. Do you feel comfortable with the franchiser’s expertise? If franchisers have little experience in managing a chain of franchises, their promises of guidance, training, and other support may be unreliable.
A growing franchise system increases the franchiser’s name recognition and may enable you to attract customers. Growth alone does not ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support services. Make sure the franchiser has sufficient financial assets and staff to support the franchisees.
Know How Much You Can Invest
A franchiser may tell you how much you can afford to invest or that you can’t afford to pass up this opportunity. Before beginning to explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.
Know What Type of Business is Right for You
A franchiser may attempt to convince you that an opportunity is perfect for you. Only you can make that determination. Consider the industry that interests you before selecting a specific franchise system.
Do you have the necessary background or skills?
If the industry does not appeal to you or you are not suited to work in that industry, do not allow an exhibitor to convince you otherwise. Spend your time focusing on those industries that offer a more realistic opportunity.
Investigate several franchises engaged in the type of industry that appeals to you. Listen to their presentations and review their materials. Get answers to the following questions:
- How long has the franchiser been in business?
- How many franchised outlets currently exist? Where are they located?
- How much is the initial franchise fee and any additional start-up costs? Are there any continuing royalty payments? How much?
- What management, technical, and ongoing assistance does the franchisor offer?
- What controls does the franchiser impose?
Get Substantiation for Any Earnings Representations
Some franchisers may tell you how much you can earn if you invest in their franchise system or how current franchisees in their system are performing. Be careful. The FTC requires franchisers that make such claims provide you with written substantiation. Make sure you ask for and obtain written substantiation for any income projections, or income or profit claims. If the franchisor does not have the required substantiation, or refuses to provide it to you, consider its claims to be suspect.
Avoid High Pressure Sales Tactics
You may be told that the franchiser’s offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price. Do not feel pressured to make any commitment. Legitimate franchisers expect you to comparison shop and to investigate their offering. A good deal today should be available tomorrow.
Study the Franchiser’s Offering
Do not sign any contract or make any payment until you have the opportunity to investigate the franchiser’s offering thoroughly. The FTC’s Franchise Rule requires the franchiser to provide you with a disclosure document containing important information about the franchise system. Study the disclosure document. Take time to speak with current and former franchisees about their experiences. Because investing in a franchise can entail a significant investment, you should have an attorney review the disclosure document and franchise contract and have an accountant review the company’s financial disclosures.
By doing your research, you are better prepared to evaluate whether or not a franchise is right for you. Look for more articles in this series to learn more about how to successfully buy a franchise.