Rush on Business

Considerations in Buying a Franchise

 Are you interested in becoming a franchisee? Franchise Note blog has a good post on Why or When is Franchising a Bad Idea for a Start Up Business. The post mentions considerations such as:

  • The start up expense:  Franchises can be expensive and perhaps cost initially more than your own start up business.
  • Are you are someone that needs to be in control? If so, franchising might not be for you because as a franchisee you definitely will not be in control.
  • Ongoing costs:  You will generally pay fees totaling 5-10% of your monthly gross revenues in a franchise business. With that kind of monthly expense can you  be profitable? Remember those fees generally are due whether you are profitable or not.
  • The feasibility of whether the franchise offers you something you can't do on your own.

To drill down further I'd offer some additional categories and questions when talking with franchisors: 

1.  Competitive Advantage of Product or Service

How is your system better than others?  Who are your competitors?  How does your business match up?  Who are your suppliers?  What are the prices of your products?  Are your products priced fairly?  Are there any restrictions with regard to products and services?

2.  Time Tested, Standardized Franchise System

How long have you been franchising?  How many franchise units do you operate?  How many units have you closed in the last three years?  How many units have been transferred or sold in the last three years?  How many units do you plan to open over the next three years?  What is the initial investment and what do we get for that?  What are your fees?  What earnings claims do you make?  What improvements have you made to your system recently?

3.  Strong Franchisor Support

How do you support franchisees?  What is the initial training process?  What support do you provide after the franchise is up and running?  What will I hear from franchisees on this subject?

4.  Financial Strength and Management Experience

Describe in layman's terms the financial strength of the franchise system.  How much revenue comes from initial fees and how much from royalties?  Is the franchise publicly traded and how has it performed?

5.  Mutual Interest of Franchisor and Franchisee

How will franchisees describe their relationship with the franchisor?  Supportive?  Combative?  Have there been any lawsuits or abritration proceedings?  What was the issue and how did it end?

Once you have these and other questions answered, you can begin to analyze whether  you're better off with the franchise or going it on your own. I also recommend reading Joel Libava's book Become a Franchise Owner. The book contains excellent suggestions and tips on whether franchising is right for you.

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