Things to Consider Before Buying a Franchise Business

November 10, 2020

Owning a franchise business is a popular way for many people to fulfill their dreams of being entrepreneurs. Everything from restaurants and cleaning services to retail stores and auto service centers are available to franchise. The benefit of buying a franchise is that you can sell goods and services that already have name recognition and a “road map” for business operations.

However, as with all businesses, there are risks and no guarantees for success. You will want to have a qualified attorney review the franchise agreement and make sure you understand all the terms. Here are a few other things to be mindful of before making a business purchase.

The True Costs
The legal right to use a franchise name and get assistance from company leadership typically comes with ongoing payments to the franchiser and other costs for operating the business, such as location, equipment, inventory, working capital, licenses, advertising, and insurance. Initial franchise fees may be non-refundable and can be quite costly. You may also be required to pay ongoing royalty fees for the right to use the franchiser’s name in your business.

Control of Your Business
Franchisers will impose some controls on the operation of your business to ensure standardization among locations. These can include site approval, design, and appearance of your location, as well as the types of products offered. There may even be restrictions on how you run the business on a day-to-day basis. One pitfall to be aware of is a geographic restriction that may be part of your contract. Your franchise agreement will usually include language covering how, why, and when either party may end the deal, which is why it’s critical to understand your rights and those of the franchiser.

Good Questions to Consider Upfront

1. How much is needed for the initial investment, and how much can you afford to lose in this endeavor?
2. Do you have the right combination of technical and management abilities to run this particular business?
3. How much time and effort are you willing to devote?

Proceed with Caution
Many opportunities sound too good to be true, and most often they are. Be wary of multi-level marketing programs. These typically involve recruiting others to work under you and receiving a royalty on their sales. Make sure your franchise opportunity does not involve activities that may be illegal.

In most franchise arrangements, there is also a level of tension between the franchiser and the franchisee. Find out by talking to other franchise owners to understand how well (or poorly) they are supported by upper management.

Finally, the federal government and many states have laws covering franchises. The Better Business Bureau, your accountant, and your attorney may also offer important insights.

Information in this article provided by Small Business Resources (SBR)
* Please consult your attorney, accountant, or financial or other advisors about your situation.