How to Buy a Franchise Business
Who Is This Tutorial For:
Entrepreneurs who want to buy a franchise instead of starting their own business.
This tutorial will serve as a guide for entrepreneurs who want to buy a franchise.
Where Can Resources Be Found:
Resources are available in this tutorial under recommended resources.
After knowing the facts about franchising and have realized that franchising could be the right option for entrepreneurship, it is best to gain additional knowledge when it comes to buying a franchise.
The tutorial will offer guidelines on how to go about buying a franchise.
Starting your own business involves taking risks, developing your own ideas, creating a business plan, finding your market niche, and establishing a customer relationship. For some, starting a business from scratch is a complicated process. Others will decide on buying an existing business but many will also consider buying a franchise.
Franchising is a legal and commercial alliance between people whose common goal is to dominate a market with one certain brand. The general idea is that a franchisee will sell goods or services being supplied by the franchiser. If you think that franchising could be right for you, then this tutorial is just the perfect guide to get you started.
The steps that follow will serve as your guideline when buying a franchise.
Step 1. Know the Factors that Could Affect your Investment.
There are factors involved when buying a franchise. It is important that you are aware of them to help you decide if investing in a franchise is the perfect option for you.
Capital. Buying a franchise involves a significant amount of money. You have to determine if you can afford the necessary capital for your investment.
Abilities. Just like starting your own business, the franchise that you choose should also be something that you are interested in. It is important that you have the skills and knowledge to back you up.
Goals. Goals motivate people and in this case, having your goal should be aligned with the kind of franchise business that you want to buy. If your goal is to be very well experienced in the food industry, then, why purchase a franchise who supplies baby products?
Step 2. Select a Franchise
If you think that you can come up with the needed capital, your skills and interests are just right, and your goals are well defined, then you are just about ready to explore the kind of franchise suitable for you. You may have known the factors that could affect your franchise investment but selecting the right franchise is an important decision.
There are two ways to find the franchise you can buy.
1. Shop at a franchise exposition.
There are franchise expositions that allow you to view and compare a number of franchise possibilities. Although you have to remember that during these expositions, the franchisers’ goal is to sell their franchise systems. It is important that you are cautious when talking to a franchise exhibitor.
The key items that you need to check with the exhibitor are the following:
How long have the franchiser been in the business.
The number of franchise outlets that currently exists.
The location of the outlets.
The fees and royalty payments involved.
Whether the franchiser offers management, technical, and ongoing assistance.
The controls that the franchiser imposes.
2. Get the facts about the franchise that you already have in mind.
In cases that you already have a franchise in mind, you should do a thorough research on that business.
The following are the areas that you need to evaluate:
The business’ income projections or income profit claims. These are required by the Federal Trade Commission (FTC) when the franchiser claims that you can earn from investing in their franchise.
The franchiser’s contact information. You may have to contact them personally if you have questions or clarifications.
The franchiser’s offer should be carefully evaluated. It is advisable that you contact an attorney to review the offer and the disclosure documents.
Step 3. Check the Disclosure Document of the Franchise
A Franchise Disclosure Document (FDD) is a legal documented present to prospective buyers of the franchise. It is important that you have a copy of the FDD before you start investing in the franchise. Make sure that you read the entire document to help you understand its key provisions.
The following are the information that has to be included in the FDD.
Business Background. The disclosure document will identify the franchise executives and their experiences. You also need to consider the length of their experience in managing a franchise. Most of the times, it is riskier to invest with an inexperienced franchiser than a more experienced one.
Litigation History. The litigation history has information if the franchiser or if the executives have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices.
Bankruptcy. The document also provides information about recent bankruptcies. You must consider this information because it determines the financial stability of the franchiser as well as his capability of delivering support services.
Costs. You need to be aware of the costs that are involved in the entire franchise operations. This includes the start up cost are the capital needed to buy the franchise, continuing royalty payments, leases and rentals, legal fees, and employee salaries and benefits.
Restrictions. The FDD often tells you the limitations that the franchiser has under your operation. The limitations could be the supplier of the goods that you purchase from, the goods that you may offer for sale, the customers that you can offer your goods, and the location at where you sell your goods.
Terminations. The document contains the conditions that the franchiser may terminate your franchise and your corresponding obligations to the franchiser after the termination.
Training and Other Assistance. In cases when training and assistance is offered by the franchiser, you have to be sure that the information is in the FDD. You also need to understand that the level of training will depend on your own business experience and knowledge.
Advertising. Most of the franchisers require you to contribute a percentage of the income to advertising fund. The FDD has this information and you have to be sure that you are aware of the advertising costs.
Current and Former Franchises. The FDD also provides important information about the current and former franchises. The document will determine the how many franchise are now operating. You also need to pay attention to the number of terminated franchises. The number may indicate problems with the business.
Earnings Potential. You engage into entrepreneurship because you want to make money. It is reasonable enough to know how much money you will make if you invest on the franchise.
Financial History. You have to remember that investing in a franchise with an unstable financial status is very risky. The financial history should not be taken for granted when reviewing the FDD. Hiring a lawyer or an accountant to review the financial statements could help you better understand and evaluate the values being indicated in the paper.
Franchising involves lower risks compared with starting your own business. You even have an ongoing support from the franchiser. But like any business venture, buying a franchise does not always equate to success. It is very important that you leave no stone unturned. Careful evaluation and thorough investigation should always be on top when buying a franchise business.
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