Written by
Matt Frentheway

Guide to Buying a Franchise

In this guide, you'll see what it really means to invest in a franchise including your costs, your contractual commitments, and a franchisor's control.

The Franchise Business Model

A franchise gives you, the investor or franchisee, access to a proven business format, ongoing support, and the rights to operate under a well-known brand for a certain period. This support can range from finding the ideal location, training, operational guidelines, to marketing strategies.

As a prospective franchisee, it's vital to understand both your financial commitment and the operational constraints involved.

The Financial Commitment

As a prospective franchisee, you'll need to prepare for both initial and ongoing costs.

  • Initial Franchise Fee: This can vary widely, but expect to invest from several thousand to hundreds of thousands of dollars.
  • Other Expenses: This includes setting up your outlet, stocking up on inventory, to getting the necessary licenses and insurance.
  • Continuing Royalty Payments: These are often a percentage of your income, payable even during tough times.
  • Advertising Fees: Part of these fees may go towards broader brand promotion, which indirectly benefits you.

Navigating Franchisor Controls

Franchisors set certain standards to maintain brand consistency. These can impact various aspects of your business.

  • Site Approval and Design Standards: Your location and outlet’s appearance need franchisor approval, aiming to enhance customer attraction.
  • Restrictions on Offerings: You might be limited to what products or services you can offer, ensuring uniformity across the franchise.
  • Operational Guidelines: Expect specifications on operational aspects like hours, signage, and even pricing on certain items.
  • Exclusive Territories: While you might have a protected area, be aware of potential franchisor competition through alternative channels.

Contractual Obligations and Their Implications

Franchise agreements are time-bound, and adherence to the contract is crucial for maintaining your franchise rights.

  • Termination Risks: Failing to meet your obligations can lead to termination, risking your investment.
  • Renewal Conditions: Renewals are not guaranteed and can come with changes in terms, potentially affecting your business model.

Deciding If a Franchise Makes Sense for You

Before you invest in a franchise, think about what you want to invest, your abilities, and your goals.

Evaluate Your Investment

Before diving into a franchise, assess your financial landscape:

  • Capital: How much do you have for this venture? More importantly, how much are you willing to risk?
  • Partnership: Will you be investing solo or with others? This affects decision-making and financial responsibility.
  • Financing: If you're considering a loan, how's your credit standing? Understand your options and implications.
  • Sustainability: Can you sustain yourself financially until the franchise turns profitable? This period can test your resolve and resources.

Assess Your Abilities

Your skills and experience are pivotal in managing a franchise. Consider the following:

  • Technical Know-How: Some franchises require specific skills. Do you have or can you acquire them?
  • Business Acumen: Experience in management or business ownership can give you a head start.
  • Skill Set: Identify what unique skills you bring to the table. This can set your franchise apart.

Clarify Your Goals

Understanding why you want to invest in a franchise can steer your decision-making.

  • Income Expectations: Know your financial needs. Can this franchise meet them?
  • Industry Preference: Are you leaning towards retail, services, or something else? Your interest can fuel your dedication.
  • Work-Life Balance: How many hours are you willing to dedicate? Your work ethic will be tested.
  • Operational Role: Deciding between hands-on management or overseeing from a distance can shape your franchise choice.
  • Future Vision: Whether it's owning multiple outlets or complementing your income, your long-term vision will guide your choice.

Review Diverse Sources

Diverse sources can help you discover the ideal franchise.

  • Local Outlets: Chat with franchise owners for unfiltered feedback on their franchisor experiences.
  • Franchise Handbook: Use it to explore franchises by business type or to discover available opportunities.
  • Franchise Expositions: Offers a one-stop-shop to assess various franchises, directly from the exhibitors.
  • Franchise Broker: A broker can match you with franchises that fit your investment size and interests.

Broker Considerations

  • Selection Range: A broader franchisor representation can offer you more choices.
  • Selection Criteria: Understand how brokers choose the franchisors they recommend.
  • Payment Structure: Knowing how a broker is paid can illuminate potential biases towards certain franchises.
  • Earnings Claims: Take broker-provided earnings claims with caution and verify through direct franchisor information or current franchisees.

Estimate Demand

  • Market Needs: Is there a real demand for the products or services?
  • Trends: Are you looking at a lasting need or a passing trend?
  • Brand Pull: Does the franchisor’s name alone drive customer interest, or will you need to invest heavily in marketing?
  • Repeat Business: Can the offering keep customers coming back for more?

Understand the Competition

  • Market Saturation: How crowded is the market both locally and online?
  • Brand Presence: Are there competing franchises with a strong local presence?
  • Price Battles: How do your potential offerings stack up against competitors' prices?

Think About Your Operational Capabilities

Consider your ability to run the franchise effectively.

  • System Stability: What's your backup plan if the franchisor goes out of business?
  • Self-Sufficiency: Can you operate independently of the franchisor if needed?
  • Ongoing Support: Evaluate the franchisor's commitment to training, marketing support, and supply chain stability.

Consider the Value of the Brand's Name Recognition

The franchise's brand can be a powerful tool for attracting customers.

  • Brand History: How long has the franchise been around?
  • Brand Reputation: What do customers think about the franchise's products or services?
  • Trademark Security: Ensure the franchisor’s trademark is federally registered to avoid potential legal issues.

Investigate a Franchisor's Background

Don’t overlook the importance of the franchisor's track record.

  • Check for Complaints: Research any grievances from consumers or other franchisees.
  • Training and Support: Is the provided training adequate and comparable to industry standards?
  • Franchisor’s Expertise: A franchisor’s success in business doesn’t always translate to success in managing a franchise network.

A franchisor's growth can be both a promise and a pitfall.

  • Brand Growth: Expanding brand recognition can benefit your business.
  • Support vs. Growth: Ensure the franchisor has the capacity to support their network without compromising quality.
  • Financial Health: Investigate whether the franchisor has the financial resources to support its franchisees effectively.

Make Your Decision

Choosing the right franchise involves a delicate balance between market opportunities, personal capabilities, and the franchisor's ability to support and grow its network. By carefully evaluating each of these areas, you position yourself to make an informed decision that aligns with your goals and market potential.

Remember, the right franchise for you is one that not only promises a return on investment but also aligns with your personal skills, goals, and the market demand in your area. Take your time, do your homework, and choose wisely. Your future success depends on it.

Getting to Know the Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is a valuable resource. It's a comprehensive overview of what you're getting into, mandated by law to be provided to you, ensuring transparency from the franchisor. Let's walk through the essential elements of the FDD that you need to scrutinize before making your investment decision.

The FDD is a snapshot of the franchisor's business health, history, and expectations for franchisees.

The FDD as Your Guide

Before diving in, ensure you have the FDD in a format that works for you and take the time to go through each item carefully. Here's why:

  • Transparency: The FDD provides a behind-the-scenes look at the franchisor’s operations, financial health, and the support you can expect.
  • Informed Decisions: Understanding the details in the FDD allows you to ask the right questions, seek clarifications, and make a knowledgeable decision.
  • Comparative Analysis: Use the FDD to compare different franchise opportunities. An accountant or lawyer can help dissect the financial and legal implications.

Franchisor’s Background (FDD Item 1)

  • Business Viability: Understand the franchisor’s longevity and competitive standing.
  • Legal Requirements: Are there special licenses or permits required? This affects both your startup timeline and budget.

Business Experience (FDD Item 2)

  • Leadership Insight: Knowing who's at the helm and their track record can give you confidence in their franchise model.
  • Management's Franchise Experience: Their experience, particularly in franchising, can be indicative of the support and insight you'll receive.

Litigation History (FDD Item 3)

  • Legal Precedents: Prior litigation could signal potential red flags regarding the franchisor's operations or franchisee satisfaction.
  • Franchisee Litigation: Understanding the nature of any lawsuits involving franchisees can alert you to common issues within the franchise system.

Bankruptcy (FDD Item 4)

  • Financial Stability: A history of bankruptcy might be a cautionary indicator of the franchisor's financial management and longevity.

Breaking Down Costs (FDD Items 5-7)

This section outlines the financial commitment required from you, covering:

  • Initial Investments: From franchise fees to setup costs, get a clear picture of what's required upfront.
  • Ongoing Expenses: Royalties, advertising fees, and other recurring costs impact your long-term financial planning.

Supplier, Territory, and Customer Restrictions (FDD Items 8 and 12)

  • Supplier Restrictions: Limitations on where you can purchase goods might affect your cost of sales and profit margins.
  • Territory Definitions: Clearly defined territories can protect your investment but also limit expansion opportunities.
  • Sales Restrictions: Understand where and how you can sell the franchisor’s products or services, including online sales limitations.

Advertising and Training (FDD Item 11)

  • Contribution: Understand your financial obligations towards national, regional, or local advertising funds.
  • Control and Equity: Inquire if franchisees have a say in the allocation of these funds and confirm that contributions are equitable across the board.
  • Utilization: Investigate how much of the fund is dedicated to direct advertising in your area versus administrative costs or selling more franchises.
  • Comprehensive Training: Assess the depth of the initial and ongoing training programs. These should cover technical, business management, and marketing aspects.
  • Support Structure: Clarify the availability of support staff and their capacity to offer individualized assistance.

Renewals, Terminations, and Transfers (FDD Item 17)

  • Renewal Rights: Understand the terms for renewing your franchise agreement. Are there fees or contractual changes?
  • Post-Termination Obligations: Familiarize yourself with any non-compete clauses that could affect your future business endeavors.
  • Transfer Protocol: If you decide to sell your franchise, know the franchisor’s conditions for approval.

Financial Performance Representations (FDD Item 19)

  • Transparency: Franchisors may provide sales or earnings information here. Scrutinize any claims for a realistic view of potential earnings.
  • Contextual Data: Pay attention to any specifics about location or operational circumstances that could influence financial performance.

Franchisee and System Dynamics (FDD Item 20)

  • Growth and Stability: Charts showing growth and owner turnover offer insights into the health and attractiveness of the franchise system.
  • Franchisee Feedback: Contacting current and former franchisees can give you a candid look at the franchise's operations and profitability.
  • Initial Experiences: Newer franchisees can offer fresh insights into the franchisor's current level of support and training effectiveness.
  • Long-term Perspectives: Veteran franchisees can provide valuable information on profitability, franchisor support, and the sustainability of the business model.
  • Independent Franchisee Associations: These associations can be a critical source of unfiltered information about the franchise system and the franchisor-franchisee relationship.

Financial Health Check (FDD Item 21)

Assessing the Franchisor’s Financial Stability

  • Financial Statements: Use these documents to gauge the franchisor's financial health, growth trajectory, and commitment to supporting its franchise system.

How to Evaluate Franchise Earnings Potential

When you're eyeing a franchise opportunity, understanding the potential earnings is critical. The allure of owning a franchise is strong, but it's essential to ground your expectations in reality. Here's how to sift through earnings claims and set realistic financial goals for your franchise venture.

Verify the Basis of Earnings Claims

  • Ask for Evidence: Don't hesitate to request written proof of any earnings claims. A reputable franchisor should provide this without hesitation.
  • Consult an Expert: An accountant can be invaluable in assessing whether the franchisor's claims are reasonable and applicable to your situation.

Understand the Nuances of Earnings Claims

  • Typical Earnings: Ensure the claim represents what's typical across the franchise, not just the top performers.
  • Average Income vs. Reality: Be wary of average income figures. They can be skewed by high earners and may not reflect the median franchisee's experience.
  • Gross Sales vs. Net Profit: High gross sales don't necessarily mean a profitable operation due to varying costs and expenses.
  • The Importance of Net Profits: Net profit information is gold. However, it's often not available, or it's based on the more cost-efficient company-owned outlets.
  • Geographic Relevance: Sales data relevant to your region or area can provide a clearer picture of what to expect.

Critical Questions to Consider

  • Is the data from franchisees in your area?
  • Does the franchisor’s claim consider varying franchisee backgrounds?
  • How many franchisees were surveyed to obtain the earnings figure?

The Role of the Franchise Disclosure Document (FDD) Item 19

Item 19 in the FDD is where you'll find any legally disclosed earnings claims. Pay close attention to:

  • Data Sources and Limitations: Knowing where the data comes from and its limitations helps gauge its relevance to your potential franchise.
  • Assumptions Behind Claims: Understand the assumptions used to arrive at these claims to assess their applicability to your case.

Factors Influencing Earnings

The Impact of Your Skills and Background

  • Skills and Experience: Your background and business acumen play a significant role in the success of your franchise.
  • Learning Curve: Consider whether you'll need to climb a steep learning curve, which could impact early earnings.

Legal Considerations and Rights

  • Disclosure Statements: Be meticulous with any disclosure statement or questionnaire from the franchisor. Accurately reporting your receipt of earnings claims is crucial for protecting your rights.

Making an Informed Decision

The journey to franchise ownership is filled with excitement and challenges. By approaching earnings claims with a critical eye and grounding your expectations in thorough research, you lay the groundwork for informed decision-making. Remember, success in franchising is not guaranteed, but with diligence, the right opportunity can turn into a profitable venture.

Armed with this knowledge, you're better equipped to navigate the complexities of franchise earnings claims. This careful evaluation not only helps in setting realistic financial goals but also steers you towards making a franchise investment that aligns with your financial and personal aspirations.

Before You Sign the Franchise Agreement

As you inch closer to sealing the deal on your franchise venture, remember the importance of staying vigilant until the very end. The period between receiving the Franchise Disclosure Document (FDD) and signing the franchise agreement is critical. Changes can and do happen, and these changes could significantly impact your decision.

Stay Up to Date on FDD Changes

  • Request the Latest FDD: Ensure you're working with the most current information by asking for any updates to the FDD.
  • Watch for Red Flags: Be alert to any new lawsuits, management changes, or adjustments in financial performance data that appear in the updated FDD.

Leverage Additional Resources

  • Accountants: Can demystify the franchisor's financials, assess earnings projections, and align a franchise with your financial goals.
  • Lawyers: Specializing in franchise law, they decipher complex contracts and identify potential issues before you're legally bound.
  • Critical Assessment: While banks might facilitate financing, perform your due diligence to ensure the franchisor's profit projections are realistic, not overly optimistic for the sake of loan approval.
  • The Better Business Bureau: The BBB can offer insights into complaints against the franchisor, giving you a clearer picture of what to expect.
  • State Regulations: Some states have laws protecting franchisees. Ensure the franchisor complies with these regulations.
  • Federal Trade Commission (FTC): Offers resources and a channel to file complaints should you encounter deceptive practices.

Conduct Ongoing Diligence

Your journey to becoming a franchisee doesn't end with finding the right opportunity. It extends through meticulous examination of the FDD, leveraging professional advice, and understanding the financial and legal implications of your investment. Here's how to ensure you're making a sound decision:

  • Stay Informed: Keep abreast of any changes in the franchisor's status that could affect your business.
  • Seek Professional Guidance: Don't underestimate the value of expert advice to navigate the complexities of franchise ownership.
  • Understand Your Rights: Know the protections available to you under state and federal law, and how to exercise them.

By following these steps and utilizing available resources, you position yourself not just as a franchisee, but as a savvy business owner ready to take on the challenges and opportunities of your chosen franchise.

The decision to sign a franchise agreement is significant, but with the right preparation and support, you can sign with confidence.

Please, grab 15 minutes on my calendar so we can meet face to face and explore whether franchising makes sense for you.

Matt Frentheway

As a successful franchisee and entrepreneur, I can help you find the best opportunity to realize your dream of being a profitable franchise owner. Using my proven process as a franchise consultant, we’ll define your goals, narrow the field, and select the best franchisor for you to achieve financial freedom.