Seven Critical Questions to Ask before You Buy a Franchise

by:Evan Hackel

Evan Hackel

When you drove to work this morning, did you pass any fast food restaurants, coffee bars, gas stations, convenience stores, tire sellers, floor covering stores, or hardware stores? I am willing to bet that you did. I suspect that at least 70 percent of those businesses were franchises.

Why have franchises become so common? It is because well run franchises work like beautiful partnerships. Individual franchises enjoy a recognized brand, advertising and marketing support, training, signs, payment and other systems. The franchisor benefits from the efforts of franchise owners to open new locations, do the daily work of running their businesses and submit ideas and suggestions to the parent company.

No doubt about it, a franchise can truly be a partnership made in heaven. If you are thinking of buying a franchise, chances are pretty good that you already realize that. You’ve been to franchise expos and visited the websites of the franchises you are considering.

You’re speeding along toward choosing your franchise. That’s good. Great, in fact. But if I may, I would like to suggest that you take your foot of the gas pedal while you ask some very important questions that can boost your chances of buying the right franchise and leading it to exceptional success.

Ready? Here we go.

Is the Franchise Really the Right One for You?

It is a sobering thought, but even very strong franchises can fail when the wrong person buys them. If you buy a franchise that is in a business sector that really excites you, your chances of succeeding are far greater, because motivation counts. In most cases, you are going to have to get out of bed every day, open your franchise, and make sure your “shop” is managed the way you want it to be. One good question to ask is, “If I were starting my own dream business, what would it be?” If the franchise you are considering is a lot different from that dream business, it could be time to step back and look for another that speaks to your emotions as well as your ambition to succeed.

Have You Studied Enough to Make a Wise Business Decision?

Franchising companies hold sales meetings for prospective buyers. They normally are very exciting, but sometimes do not tell you the full story. Before you make that big commitment to buy:

  • Read the franchise agreement from the first sentence to the last and make sure you understand every word of it. It a good idea to take it to an attorney who has expertise in businesses and franchise purchases, and go over everything. The cost is minor in comparison to the risk you are taking.
  • Study at least five or six franchise agreements from different franchisors and compare them to the agreement from the company you are considering. You will quickly understand what makes the franchise better than others – or worse.

And another thing. If you attend a franchising company’s meeting for future buyers and feel excessive pressure to buy, that can be a sign that the company is not one you want to become your partner in the future.

Do You Fully Understand the Real Costs of Running the Franchise?

Your FDD will give you a good list of franchisor expenses, and many provide great information in their item 19 financial disclosure.  Most franchisors give you all the details on what you should expect in the areas of sales, costs and a business ramp up. They take those projections seriously because they are concerned about risk; their projections could be determined to be a promise.

The bottom line is, you need to create a real budget and cash flow projections for your business. Here are some things you can do:

  • If the franchise system is selling a location that is not in your area, you can request to see information on that purchase. When a franchise location is for sale, you are allowed to see past real financial information.
  • When you call franchisees as references on the system, ask them questions that can help you build your financial projections.
  • If you are uncomfortable creating projections, get an accountant to help you. You don’t need to be a financial expert run a successful franchise, but you do need financial expertise to choose the right system for you. Get help if needed.

How Much Leeway Will You Have to Run Your Business the Way You Want to?

On one hand you want a lot of leeway and control over your business. On the other hand, strong and enforced rules protect you from the activities of other franchisees that can hurt the brand. You should be very concerned if you are given a lot of leeway, because strong brands are built on consistency.

The “however” to this is to make sure the system is very engaged and asks franchisees for input. Good things can only happen when good ideas from the field get filtered up to senior management.

What about Competition Near Your Location?

Most franchise companies take an active role in helping you select a location for your new franchise. That can benefit you, because well-established franchises know specific cities and towns where your franchise is needed and apt to succeed – as well as the locations that are the most profitable, such as strip malls, stores in large malls or stand-alone roadside buildings.

When it comes to selecting a location, disasters can happen. While it is never possible to prevent all mishaps, you can turn the odds in your favor by taking steps like these:

  • Shop your competitors. Know what you will be up against.
  • Talk to local businessman. More than anyone else, they can tell you about new stores that are coming to the area. They can also tell you about future housing developments, hospitals, movie and sports complexes that can bring more customers to you.
  • Subscribe to local newspapers and visit community bulletin boards online. They are a good source of information about local plans and trends.
  • Do Google searches. The goal is to learn everything you can about the community.
  • Visit town hall and review building permits that have been filed in the area. These are public records and they can tell you a lot about local developments and trends.

How Many Current Owners of the Franchise Have I Talked to?

Get to know as many current owners of the franchise you are considering, even if you have to travel to visit them. After all, you are making a large investment of time and money. Why take shortcuts? As you talk with current owners, take these steps:

  • Ask about doing business with the parent company. Have there been unexpected expenses and unpleasant surprises, or has the partnership been great?
  • Understand the system culture, how franchisors and franchisees interact, whether franchisees help each other, and whether the franchisor is listening to the franchisees.
  • Ask about what is good and bad, it’s a simple question that can tell you a lot.
  • Spend time in their locations and even work in them for a few days. You can learn more by “being there” than you can by reading company-provided materials.
  • Ask if you can review their financial statements. This might not be a comfortable question to ask, but those documents can reveal critical information about the franchise you are considering.

Remember, the willingness of franchise owners to help you tells you a lot about the system. And another thing. Always talk to franchisees that weren’t recommend by the system. How many should you talk to? The simple answer to that question is that you should keep talking to them until you feel comfortable that you are making a good choice. That number could be as few as five franchisees, and as many as 20.

Does the Franchising Company Practice an Ingaged Leadership Style?

This is the kind of leadership that I explain in my new book Ingaging Leadership: A New Approach to Leading that Builds Excellence and Organizational Success. I am pleased to report that more and more franchising companies are applying this kind of leadership in their interactions with franchise owners. If they do, current owners of the company’s franchises will tell you that people from the parent company:

  • Really listen to suggestions and input.
  • Allow franchisees to participate in discussions about decisions about many aspects of how the company is changing and how it operates.
  • Offer ongoing support and communication – not micromanaging, but actively helping franchisees succeed.
  • Engage in continuous learning about the system by visiting locations, returning phone calls, maintaining a franchise advisory board, holding town hall-style meetings and taking other steps to stay engaged. 

Also gather information on how franchisees work together. Do they have regional networking groups? Do they support other owners of the same franchises in nearby locations, or try to put them out of business?