Owning a franchise can be a highly profitable venture. Let’s face it, being your own boss while having the support of a market-tested, proven brand can be quite appealing. Yet, making the decision to purchase a franchise is often wrought with fear, anxiety and uncertainty.
Here are five steps to take that will help ensure you are making a level-headed and educated decision.
1.) Research the industry and the territory
Even if the market is hot now, are there changing factors down the road? You need to find out whether the market is in long-term growth mode or decline to ensure profitability now and down the road. More specifically, take a look at your would-be territory. Is it dense with competition or in high-growth mode?
2.) Determine you investment comfort level
Take a close look at your finances and be candid with yourself about how much are you willing to invest? Keep in mind that the franchise company will review your liquid capital, or your assets-to-liabilities along with your net worth. The company wants to be sure you are capitalized to the point that you won’t drain the resources of the franchise company.
3.) Research the franchise history
Learn about the origin and management of the franchise as well as its culture. What kind of support will you receive? You’ll want to find evidence of stability and professionalism. All franchises will file a Franchise Disclosure Document (FDD) with their complete business details, including any litigation and bankruptcy information. Keep in mind that the FDD will not be sent to you until the franchisor has determined that you are a good candidate.
4.) Examine the Financial Statement
Once you have the FDD, you will want to go through the financial statement with a fine-toothed comb. This is when you’ll want to evaluate and ask as many questions as you can. Your CPA can help you review the statement to uncover any red flags. Check article 6 of the FDD carefully to see that the franchise is making money on its royalties, not by providing owners with “other services.” Some franchisors reward their owners with a sliding royalty scale based on revenue: the more you earn, the less royalty you will pay.
5.) Are you in it for the long-term?
Finally, make sure you are committed for the long-term. It can be quite costly to back out once you have signed a franchise agreement, most of which generally last for roughly 5-15 years. Do you have an exit strategy? That may be the last thing you’re thinking about as you evaluate a franchise, but it’s one you should take seriously. Think about what would happen if you became ill or experienced another crisis—would you sell or transfer the business?