20 Questions to Ask Before Buying a Franchise

By Akhil Shahani, an EO Mumbai member and director of The Shahani Group

If you are contemplating buying your own franchise, you are sure to have myriad questions running around in your mind begging for answers. To ease your mind and to give you control during the decision-making process, we’ve prepared a checklist of 20 questions that you have to get the answers to before making the big leap:

  1. How long has the company been in existence before it started franchising? Was it specifically set up to franchise?
  2. What is the company’s financial position? You should check accounts for at least the last three years. Can you get trade or bank references? 
  3. Can the franchiser show you any figures of net profits of one or more of its existing franchisees, and can you personally check the figures with the franchisees themselves?
  4. What are the criteria to be selected as a franchisee?
  5. As a franchisee, what are your obligations? Are there any operational restrictions on pricing or use of suppliers?
  6. What is the nature and extent of the rights that will be granted to you?
  7. How many franchised units are currently in operation? Are there also company-owned units in operation?
  8. Does the agreement have a termination clause; if yes, what will it cost you? Can you sell your franchise?
  9. Does the franchiser have a reputation for honesty and fair dealing among its franchisees?
  10. What kind of assistance will the franchiser provide? Will it involve management and employee training programs, advertising campaigns, credit and merchandising ideas?
  11. Does your state have a law regulating the sale of franchises, and has the franchiser complied with that law?
  12. How much equity capital will you need upfront to purchase the franchise and operate it until the profits start rolling in? Will there be sufficient profit left once you have paid all your expenses?
  13. What are the initial and ongoing fees? Are there any other hidden costs?
  14. Will you get the exclusive rights to the territory for the length of the franchise period, or can the franchiser sell a second franchise in your territory? If the answer to this question is ‘yes’, what is your protection against the second franchising company?
  15. Have any franchised units failed during the last 12 months? What were the reasons?
  16. Is the franchiser a member of the FASA? Have they ever been refused membership?
  17. In the event of a dispute between the franchiser and the franchisee, how will it be dealt with?
  18. What is the procedure for terminating the agreement and what are the consequences of doing so?
  19. How is the communication between the franchiser and franchisees? Is it possible to talk freely to existing franchisees?
  20. What are the franchiser’s long-term plans for the future of the business?

Though business surveys show that fewer than 20% of all franchised businesses fail compared to the 60-80% failure rate for all new businesses started in the U.S. each year, it is necessary that you investigate a franchise opportunity thoroughly. The above checklist will serve as the starting point of your franchising journey. If you can get the answers to each of these questions, and those answers satisfy you, then you’re probably on the way to becoming a proud franchise owner. But be sure to have your attorney study the franchise contract and discuss it completely with you.

Akhil is a serial entrepreneur who wants to help you succeed. For more articles, click here.

Categories: Business/Finance Tips

Tags:

Leave a Comment

  • (will not be published)

ERROR: si-captcha.php plugin says captcha_library not found.