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Five Tips for Choosing the Right Franchise

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Before making that all important decision in choosing a franchise, here are five tips that can help you avoid making the wrong choice.

Tip 1: Fully Understand the Implications of Buying and Operating a Franchise.

There are advantages and disadvantages to owing a franchise and although franchising is a proven business model, buying a franchise is not a guarantee of success. Many individuals purchase a franchise with the expectation that the “cookie-cutter” nature of a franchise program insures success. Operating a successful franchise takes hard work and in many cases lots of “blood, sweat and tears.” It can take a year of long hours before a franchise becomes profitable or reaches break-even. This is often the rule rather than the exception.

Also, be prepared to give up some freedom, since operating a franchise involves compliance and the willingness to follow the franchise “program.”

Tip 2: You Should be Able to Lose Some of Your Investment

Although this may appear to be a pessimistic or negative thought, don’t mortgage you and your family’s financial future by investing everything you have in a franchise. A frequent cause of franchisee failures is insufficient working capital. When doing your business plan and financial projections be sure to factor in the need for added working capital. The Franchise Disclosure Document that is provided by the franchisor includes an Initial Investment schedule. The Additional Funds entry indicates an estimated three months working capital, which is above and beyond the other expenses you’ll incur in starting up your franchise. Three months is a short period of time for starting up any business. Don’t make the mistake of underestimating your working capital and personal financial needs when selecting a franchise and be sure you have a financial cushion.

Tip3: Confirm that You Have the Aptitude and Attitude to Operate the Franchise

There are over 2,500 franchise opportunities for sale and as such there are different skills required for different franchises. Some business service franchises require strong selling skills while a food or restaurant concept may require strong organizational and management skills. When considering most franchise opportunities a good rule of thumb is: If you can’t do the work don’t buy the franchise.

Do an objective inventory of your skills and personal profile and when you’re finished seek the advice of family and friends to confirm the results. (A number of franchisors do pre-selection testing of franchise candidates) This process can help you better match your skills with the requirements of the franchise. Keep in mind Tip 1. The last thing you need is to work long hours in a business you don’t like and have difficulty operating. If in doubt spend a day or two with a franchisee so that you can get a feel for the business. Make sure you have the ability to implement and operate the franchisor's program, to work hard and to persevere until success is yours.

Tip 4: Speak to as Many Franchisees as Possible and Ask Lots of Questions

The best source for evaluating a franchise opportunity is an existing franchisee. Before you make that final decision you be sure to speak to a number of franchisees, including some who have been terminated. Existing franchisees can tell you everything you need to know including the level of support from the franchisor and whether the franchisee has achieved their financial expectations. If you do a simple search of the Internet you’ll find suggested questions to ask. From the FTC to various State sites, there is no lack of information, when it comes to the kinds of questions to ask franchisees. Finally, when speaking with franchisees keep digging until you get the information you’re seeking.

Tip 5: Use a Franchise Attorney to Thoroughly Review the Franchise Agreement

The franchise agreement is a binding legal contract that favors franchisors. It contains obligations and requirements that will bind you to operate the franchise in a specific manner. Some provisions in a franchise agreement are not easily understood by a non-professional. In point of fact, an attorney not familiar with franchise law may inadvertently overlook a particular provision. Once you sign the franchise agreement including personal guaranties and the acknowledgement agreement you will have very little “wiggle” room unless the franchisor patently abuses its franchisees. From a franchisee perspective the agreement will set forth the services and support that the franchisor is obliged to provide. Make sure you understand what you’ll be receiving and when in doubt seek clarification.

If the franchisor makes any representations that are important to you be sure to obtain this information in writing.

In conclusion, there are a number of steps involved when seeking, evaluating and purchasing a franchise. To enhance your probability for success, be sure these Five Tips are included as part of your franchise process.

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

 
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