Should You Buy a Franchise? Answers to Frequently Asked Questions

Have you ever thought about becoming a franchisee? There are some great opportunities out there for enthusiastic and hard-working entrepreneurs, but first you need to do your homework. Here is some basic information that you need to know if you're considering buying a franchise.

What is a franchise?

Franchising is the practice of licensing others to use your successful business model. A franchise is basically a clone of that business model. The franchisor has replicated its method of doing business, and licenses those "clones" to franchisees. Anyone interested in doing business using the franchisor's brand and system can apply to become a franchisee. If the applicant is successful, the franchisor and franchisee (and any guarantors) enter into a Franchise Agreement in which the relationship between the parties is described in detail.

What sort of laws govern franchises?

In the United States, China, some Canadian provinces, Australia, France and Brazil, there are specific franchise laws that provide for full disclosure of all relevant facts and information to protect prospective franchisees. In most other jurisdictions, franchise is considered a distribution system, and the laws that cover other distribution networks apply (including trademark).

What are the pros to buying a franchise?

The franchisor is selling a business that has already proven to be successful.
A successful business has brand power, instant name recognition and offers a level of quality that is already known to customers.
Most franchisors offer some degree of ongoing marketing and operational support to their franchisees.
Franchisees can benefit from the franchisor's marketing campaigns.
Franchisees may be able to keep inventory costs down by using the franchisor's suppliers.

What issues do I need to consider if I want to buy a franchise?

If you are considering buying a franchise, you need to thoroughly research all aspects of the franchisor-franchisee relationship, and the past record of the franchise you're considering. Some questions you need to answer before deciding to apply for a franchise:

Does the franchise brand have long term value that is sustainable and/or that can be enhanced?
What is the product / service being sold to the end user? How does the end user feel about the quality of the product / service?
Why is the product / service better sold by a franchise rather than by a non-franchised business?
Is the product / service unique in the marketplace? Is it protected by copyright or patent?
Is the pricing competitive? Does the price reflect the value received?
Is the product / service sold via the most effective locations or types of outlets (e.g. branded retail stores, online, through distributors, etc.)?
Is the product / service promoted effectively? Do customers understand and respond to the promotional strategy?

What should I look for in a franchisor?

There is more to a franchisor than just a successful business method. Here are some questions you need to ask about the franchisor:

What is the reputation of the franchisor? Is the franchisor perceived as being of good character and socially responsible? Are they a member in good standing of the relevant industry trade associations?
Talk to some existing franchisees and see how their business is doing and how they feel about the franchise system. Is there anything they're unhappy with? Has anyone left the system?
What is the franchisor's financial position? If you've submitted a franchisee application, the franchisor must provide you with full disclosure, including financial information. If you haven't submitted an application, you should try to obtain financial information from another source (if possible).
What is the background of the management team? How much experience and expertise do they have? This information will also be included in the disclosure document.

What are the factors that make a successful franchise system?

Before you buy in, it's essential to determine whether the franchise system itself is successful. Key factors to examine are:

How successful has the franchise system been to date? Are its franchisees doing well? How does the failure rate compare to other similar franchises and to non-franchised businesses?
How does the franchise system pick its location sites? How successful have these sites been?
How does the franchise system choose franchisees? What is the turnover rate? Have franchisees achieved acceptable ROI and are they happy with their investment?
Does the franchise system have the necessary controls for early detection of problems in the overall business, as well as in the individual franchisee operations? Does it work effectively with its franchisees to resolve problems?
Does the franchise system have a good relationship with its suppliers?
Does the franchisor offer additional services to its franchisees to help them develop and succeed in their business?

How much will it cost me to invest in a franchise?

Don't sign up until you know exactly what the total cost of your investment will be (upfront costs and recurring fees), and how long it will be before you see a return. There are many things to consider:

Upfront costs - Franchise fee, initial cash investment, operating licenses, inventory, equipment, staff training, outfitting the location, etc.
Ongoing fees - Royalties, advertising fees, management fees, minimum purchase quotas, etc.
Break-even point - How long will it take to reach break-even? What is the profitability potential?
Projections - Are the franchisor's 5-year business plan projections attainable?
Financial Services - Does the franchise system offer financial services to its franchisees through a major bank?

What should the Franchise Agreement contain?

Don't sign anything or pay any fees or deposits until you have reviewed the Franchise Agreement with a lawyer experienced in franchising. The Agreement should cover all of the following areas:

Term - How long is the initial term? Do you have the option to renew it, and on what terms?
Territory - What is the territory of your franchise? Do you have exclusive rights within that territory?
Support - What type of support will the franchise system provide for start-up, training, and ongoing business assistance?
Restrictions - What restrictions are there on the way you operate the business? Do you have to purchase supplies directly from the franchisor or its suppliers, or can you also purchase materials from third parties?
Dispute resolution - Are there provisions for resolving disputes between the parties?
Liabilities - Does the franchise you're buying have any outstanding liabilities? Who is responsible for clearing those?
Termination - Do you have the right to terminate the Agreement, and on what grounds? What happens if you want to sell or assign the franchise?

If the answers you get to all of the foregoing questions are satisfactory, congratulations! You've taken the first step to becoming a franchisee.