Thinking of buying a franchise? Before you sign any papers, you need to be very thorough in your research about your prospect. Buying a franchise is a serious investment. When you sit down to talk to a potential franchisor, treat it like a job interview and have a series of questions prepared for them to answer. Here’s a list of five of the most important things you should ask.
What will my startup investment need to be?
This amount can range depending on the franchise. While Item 5 of the Franchise Disclosure Document (FDD) lists the initial franchise fee, and Item 7 details additional start-up costs such as real estate, equipment, licenses, etc., this is definitely a topic that you want to discuss in-depth with a prospective franchisor.
How much money will I need to have on hand until the franchise turns a profit?
Obviously, the financial aspect of opening and establishing a franchise will be a major part of your questions and concerns as you move forward. After you determine how much of an investment the franchise will require to get things off the ground, you also need to know how much liquid capital is required until your franchise starts to make a profit. Most franchisors advise franchisees to plan for enough operating capital to last for the first several months until the business breaks even.
Will the franchisor assist with any of the startup costs?
Most franchisees will acquire a loan of some sort to assist with the startup costs of their franchise and in many cases franchisors will assist with these costs. If equipment is involved, franchisors may offer financing options. If this is the case, you should compare their terms with those of other lending institutions. It could be extremely beneficial if your lender is also your business partner should tough times be encountered.
If the franchisor doesn’t offer financing, ask them what banks or other lenders they have relationships with. Lenders are focused on minimizing risk, and if they have already vetted a concept thoroughly they will be more apt to offering financing, and at a competitive rate.
How strong is the franchise—from their financials to the number of locations to their success rate?
The answer to this question will help you determine how fiscally sound the prospective franchisor is. Item 21 of the FDD provides the most recent financial statements for the franchisor which will give you an indication of the franchise system’s financial picture. Ask about their plans for growth, as well as whether their income comes from royalties or the sale of franchises.
Additionally, the number of franchisees and their success rate provides good insight into a franchisor’s success. The number of locations will let you know the size of the network, but you still need to drill down to see if those franchisees are receiving the support they need. That’s where the success rate comes into play.
What support does the franchisor offer franchisees after the initial training?
The great thing about being a franchise owner is being in business for yourself, but not by yourself. That is why it is important to determine if your prospective franchisor is truly there with you for the long haul. Is there support staff you can access on a day-to-day basis? Are there ongoing training opportunities? Is on-site assistance available?