10 Things to Ask Before Buying a Franchise

10 Things to Ask Before Buying a Franchise
Like any investment, buying a franchise requires a significant amount of due diligence. Andrew J. Sherman, a corporate and transactional lawyer, business and law school adjunct professor, and author of Franchising & Licensing: Two Powerful Ways to Grow Your Business in Any Economy (AMACOM; $45) recommends asking the following questions before cutting a check:
1.  What is the background, team, and track record of the franchisor?
Visit the franchisor’s website; use Internet search engines as well as social media to see what’s been said about them.
2. What are the key trends within the franchisor’s industry? “You have to look at what macro or micro trends are out there that might affect the business over the next five, 10, or 15 years,” says Sherman.
3. What is the competition in the local market, and who represents the target demographics? If the franchise targets a niche market, such as daycare or certain ethnic foods, be sure that the area’s population has that audience.
4. What are the total projected costs to get the franchised business open to the public? Though it seems obvious, Sherman points out that some forget to factor in personal expenses.
5. What is the franchisor’s relationship with its current franchisees, and has there been any history of litigation? Things such as relationships won’t show up in a Franchise Disclosure Document, and it doesn’t hurt to visit a franchisee and ask a few questions.
6. What is the business model and profitability of the franchised business? Speak with existing franchisees about what works for them. “It’s very important to do your own budget, projections, and pro forma,” Sherman recommends. “Don’t just take the numbers given by the franchisor at face value.”
7. What is the size of and degree of protection of the assigned territory? The franchisor is required to tell you if the territory is protected and its size and how many other franchisees the franchisor can appoint in your market.
8. Are there any requirements to purchase any goods or services directly from the franchisor, its affiliates, and designated vendors? In the case of eateries, food components will just about always be purchased from the franchisor, but the franchisee may be able to buy things such as cleaning goods and toilet paper elsewhere at a discount.
9. What’s the company culture like? Sherman suggests asking other franchisees in the system whether the parent company’s management consistently interacts with them as well as the IFA.
10. What is the strength and market recognition of the franchisor’s brand and strength of its intellectual property? You want to determine whether you can build off their brand or will struggle to introduce it to your market.

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