I’ve been witness to many franchisees who failed to complete thorough due diligence on a particular franchise and simply “taken the leap.” Big mistake. Here are several tasks that you absolutely must complete (and receive answers to your satisfaction, of course) before signing the Franchise Agreement.
1. You will need to present clear documentation of your financial affairs. Franchisers will want to see that you are financially secure before they will award you a franchise.
2. Review the FDD (Franchise Disclosure Document, provided by the franchisor to prospective franchisees) carefully. Among other details, look for any litigation issues, the franchisor’s obligations to their franchisees, the franchisee’s obligations to the franchisor, any restrictions on sources of products or services, and any financing that the franchisor may provide or recommend.
3. Pick the brains of current franchisees. Ask questions regarding the level of support from the franchisor, the time it took to reach the cash flow breakeven point, any disputes with the franchisor, and the company’s competitive advantage, just to name a few.
4. Ask the franchisor exactly what the franchise fee covers. Some investments pay for all start-up costs, while others don’t include training and marketing to keep the up-front cost low.
5. Determine how much cash you have to invest up front. Some franchises may be out of reach simply based on the required down payment. Franchising a McDonald’s, for example, costs well over $1 million, while ServiceMaster Clean only requires about a $40,000 investment.
6. Size of your franchise. Decide whether you prefer a large franchise operation that offers more brand-name value or a smaller franchise that features more personal, hands-on support and responsiveness if you run into problems.
7. Support. Ask about hiring personnel, marketing, and advertising and the level of support and training provided for each.
8. Seek counsel. I always highly recommended that you hire an experienced franchise attorney to review the franchise agreement in its entirety so you have a clear understanding of all of its contents. An attorney who is inexperienced with franchise law will not be qualified to adequately ensure your complete understanding of the details set forth in the franchise agreement.
9. Find out what the franchisor’s expectations are in terms o profitability and other key numbers. Some franchises demand quick success translated into specific sales numbers, while others will allow you time to grow.
10. If applicable, invest plenty of time when hiring a general manager or supervisor who will be overseeing your franchise business. Ideally, you’ll choose someone with industry experience in order to give yourself the best chance of success.
11. Find out about sources of supplies and equipment. Some franchises require that you buy almost everything you need from them or a designated supplier, which can be a major plus for you, as you’ll benefit from economies of scale. Be sure that pricing is reasonable and competitive with other sources in your area.
12. Last, but certainly not least, identify your skills, passion, and interests and match them to an appropriate franchise. If you have a culinary background, a restaurant franchise may be a great choice, as it would match your skill set. However, if you’re not a handyman and have no interest there, you might want to stay away from a home improvement franchise. This is so important, as you will never succeed in a franchise business model that you are less than passionate about!
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