How to Buy a Franchise

If you want to go out on your own, but not necessarily start a business from scratch, buying a franchise may be an option to consider. You can own your business and get support and guidance as you start out. Franchises also have a track record you can investigate. The odds of success are actually greater with an established company than with a start-up, but the downside is that franchise fees, royalties and other issues can drive up the overall costs of doing business.

Instructions

Difficulty: Challenging

Things You’ll Need:

• General manager
• Initial investment money
• Attorney
• Uniform Franchise Offering Circular
• Financial model

1. Identify your skills and interests to target an appropriate franchise. If you have a design background, a sign-making franchise would match your skill set. If you don't even like to pump gas, stay away from an oil-change franchise.
2. Be aware that you'll still have a boss. Even though it's your business, franchises have tight rules and regulations.
3. Determine how much cash you have to invest up front in such a venture. Some franchises may be out of your league simply based on the required down payment. Setting up a McDonald's, for example, costs nearly $1 million, while Chem-Dry only asks for $7,950 down.
4. Choose between a larger franchise that carries more brand-name value and a smaller operation that offers more personal, hands-on support and responsiveness if you run into problems.
5. Investigate how long the business has been around. Many franchises have surprisingly short life spans. Think of all the frozen yogurt joints and muffin shops that have gone belly-up. Assess whether a franchise is riding out a short-term fad or is part of a trend, like Dunkin' Donuts, that's here to stay.
6. See How to Finance Your Business Idea and run your own detailed financial model. Don't rely on the numbers the franchiser gives you. Create a detailed analysis of sales, cost of sales and goods, overhead and franchise fees. Determine how much you have to invest up front, and how much you will take home at the end of the day. Check out the royalties: The going royalty for a franchise is anywhere between 3 and 10 percent of what you gross. If you need help, pull in an accountant or financial planner with expertise in franchises.
7. Ask what the company expectations are: Some franchises demand quick success translated into specific sales numbers, while others will give you time to grow.
8. Find out how you will be supported. Will the franchise help with ads, bookkeeping and personnel matters? Ask how much training the parent company offers and what it involves.
9. Hire a franchise attorney to review the documents and help negotiate a deal with the franchisor. You want someone with particular experience with franchises, rather than a general practice lawyer.
10. Review the UFOC (Uniform Franchise Offering Circular, provided by franchisors to prospective franchisees) carefully to understand how well the franchise has been doing, what its prospects for the future are, and how happy its current franchisees are.
11. Look carefully through the UFOC, which the U.S. Securities and Exchange Commission requires franchises to prepare, for any signs of franchisee discontent (see Resources). Pending litigation or a class-action suit is a sign that there may be problems.
12. Put your financial affairs in order. Most franchises will want to see evidence of your financial security or business experience before selling you a franchise.
13. Talk to other franchises. Pick their brains for every bit of information and feedback you can get. Track down franchisees who have left the company to understand what went wrong for them. Their story could be yours.
14. Ask your banker or attorney if they've heard anything--positive or negative--about the franchise.
15. Find out about supplies and equipment. Some franchises require that you buy almost everything you need from them, although you may benefit from economies of scale. Be sure the rates are reasonable and competitive with other sources.
16. Ask what the franchise fee covers. Some investments pay for all start-up costs, while others don't include training and marketing to keep the stated up-front cost low.
17. Find out if additional capital investments will be needed down the line in order to be profitable, or if the start-up costs are the only major investment.
18. Hire a general manager or operations supervisor with industry experience in order to give yourself the best chance of success.

What to Look For:

• Suitable business and approach
• Franchise history
• Ongoing support
• Adequate training
• Terms of royalties
• Supplies and equipment