1. Question the franchisor: The decisions you make about your potential business should be based on information from very precise questions to the franchisors. Questions like, what is the initial franchise fee? These fees vary from franchise to franchise and can be up to several hundred thousand dollars.
You will most likely also have to pay an advertising fee to help promote the franchise. You will need to know the amount of that fee, or how it is calculated (sometimes calculated as a percentage of sales) and how much of that is used for local advertising and how much for national exposure.
Royalty payments are payments to the franchisor for the use of the franchise name. They are usually calculated as a percentage of weekly or monthly gross sales. Again, this number can vary from franchise to franchise and should be well understood before proceeding.
Find out the terms of the franchise agreement, including the length of time the agreement will last (usually 5 years), how you can terminate that agreement, and what the franchisor’s guidelines are for terminating the agreement.
Finally, some franchises will require you to do financial reporting every day along with keeping your system consistent across franchises. Asking if there is some flexibility will help you make a better decision on the franchise that suits your needs. You will also need to ask yourself if you can live with these processes or if it is too burdensome to allow you to exercise your own business judgment.
2. The UFOC (Uniform Franchise Offer Circular). Much of the above information will be included in the UFOC. It will be extremely important that you read this circular carefully and even have it reviewed by a professional before signing any contract.
3. Now, if you’ve gotten this far with a particular franchise, you’ll want to talk to someone who actually runs their own franchise. Try to get a couple of different perspectives on the business. You need to realize that some of the people you will talk to will give you a negative perspective on the business. Your challenge will be to analyze all of this to make the best decision for you and your goals. Below is a list of possible questions you might want to ask the franchisee.
o Are you satisfied with your franchise?
o What kind of income is your franchise generating?
o If you had to do it again, would you buy the same franchise or a different one?
o Was the training comprehensive, how long did it last and did you like it?
o Are the franchise fees you are paying the same as your interpretation of the agreement, or are they more?
o What type of business experience did you have prior to purchasing the franchise?
o Were there hidden franchise fees or unexpected costs?
o Did the franchisor correctly estimate the amount of operating cash you would need or underestimate it?
o Is your territory big enough to achieve your goals?
o Can you sell other products or do you have to sell and use only theirs?
o Does the franchisor advertise as much as it said it would?
o Does the franchise give you an exclusive territory during the term of the franchise?
o If necessary, will the franchisor help you find a location that is suitable?
o What determines a territory
Before making any decisions, be sure to get any agreement in writing and consider getting professional advice. Check with a lawyer about the legality of the business and make sure you fully understand the contract. An accountant can review finances and promised income. The money and time spent seeking professional advice can prevent you from making a bad business investment.
