4 Things To Look Out For When Buying A Franchise

As an advisor with over 10 years of experience helping entrepreneurs start and expand their businesses, I always caution clients to do in-depth research before investing in a franchise opportunity. Buying a franchise can be an exciting prospect, but you want to enter the agreement with realistic expectations.

Let‘s explore some key factors you should look out for when evaluating a franchise:

Territory Protection

  • One of the first things you want to nail down is whether the franchisor provides exclusive territory protection for your location. This means no other franchisees of that brand can open within a protected radius around you.
  • According to the International Franchise Association, 68% of franchises offer some form of territorial protection. But the exact size and boundaries can vary greatly.
  • Be sure to get geographic specifics in writing, rather than vague assurances. You want to know you won‘t face encroachment.
  • Look up the franchise on UnhappyFranchisee.com to see if existing franchisees have had issues with territory disputes.
% of Franchises Offering Exclusive Territory
68%

Required Investment

  • The average total investment to open a franchise is $1.6 million, but individual costs can range from tens of thousands to multi-millions.
  • Understand all the required fees outlined in the Franchise Disclosure Document (FDD), including:
    • Initial franchise fee – $30K to $80K+
    • Real estate & buildout – $200K to $1M+
    • Equipment & supplies – $50K to $500K+
    • Working capital/inventory – $30K to $500K+
    • Grand opening marketing – $15K to $100K+
  • Work with your financial advisor to put together detailed projections and secure business financing before signing the franchise agreement.
Initial Franchise Investment Range
$30,000 to $7,000,000+

Passive vs. Active Ownership

  • Some franchises allow absentee or passive ownership, where you rely on hired managers to operate your location. This can enable multiple franchise outlets with less hands-on involvement.
  • Other franchisors require franchisees to take an active, on-site role in managing daily business operations and overseeing staff.
  • Carefully consider whether you want direct involvement or prefer an more passive, investment-focused approach based on your lifestyle, business goals, and capabilities.
  • Ask existing franchisees how much direct oversight and management the business model realistically requires.

Relevant Experience

  • Many franchisors require 1-5+ years of prior industry or management experience before awarding a franchise. For example:
    • Restaurant franchises may require restaurant GM experience
    • Retail franchises may require prior retail store management experience
  • However, some concepts are open to less experienced franchisees and emphasize the training program.
  • Gauge your own experience level. Do you already have solid experience to draw from? Or will you need extensive training and support from the franchisor?

Brand Power

  • An established brand with strong name recognition is extremely valuable. Consumers are familiar with well-known franchises like McDonald‘s and trust the brand.
  • But an unknown franchise concept may struggle to get off the ground, requiring extensive marketing to educate consumers and generate interest.
  • Research brand awareness and reception in your local market:
    • Conduct an online survey to gauge familiarity with the franchise.
    • Check online reviews and social media sentiment for brand perception.
    • Drive around town to observe competitor brands and current white space opportunities.

Ongoing Royalty & Fees

  • You will pay an ongoing royalty fee to the franchisor, usually 4-8% of gross sales, for use of the brand and services.
  • Understand the impact of royalties on your profit margins. Royalties must be paid regardless of your outlet‘s individual performance.
  • Review the Franchise Disclosure Document for any clauses allowing the franchisor to increase fees.
  • Request sample profit & loss statements from existing franchisees to gauge potential earnings.
Average Franchise Royalty Fee 4-8% of gross sales

Ongoing Support

  • Look for franchises that offer continuous support after you open your doors – it can really impact your success.
  • Essential support services can include training, inventory purchasing, marketing/advertising, technology platforms, HR guidance, legal advice, and more.
  • Clearly understand what ongoing support the franchisor provides. Is it included or will you need to pay additional fees for certain services?

As an entrepreneur advisor, I always recommend doing extensive due diligence before making a franchise investment. Vetting the franchisor, analyzing the FDD, verifying brand reception, and understanding the business model will help set your investment up for success. Please feel free to reach out if you need guidance evaluating a franchise opportunity!

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