August 23, 2014

5 Tips for Buying a Franchise

buying a franchiseFor those entrepreneurs itching to start their own business, purchasing a franchise can be a good alternative.

Franchising can be less risky than starting a business from scratch. The franchisor has done a lot of the work for you. The business plan is ready made; there’s already strong brand name recognition, and the franchisor is often responsible for the marketing and advertising.

However, any new business is risky, even a franchise. You may get an established name and business plan, but your success is ultimately up to you.

If you are considering taking the leap to become a franchisee this year, here are five tips:

Do Your Research

Whether you identify a potential franchise opportunity from a franchise broker or franchise exposition, you alone are solely responsible for the due diligence before you invest. Start by reading the Franchise Disclosure Document (FDD) to find out important details about the franchise company, litigation and bankruptcy history, as well as your initial fees, investment, and obligations.

According to franchise expert and consultant Joel Libava, potential franchisees should:

“Make sure they find out exactly what their role will be as the Owner. Don’t base it on what you see in a beautiful franchise brochure. Ask the existing franchisees what their day is like…what they do as the owner.”

For Libava, it’s critical to speak with other franchisees before signing on the dotted line. Ask existing franchisees about the total investment:

  • Was their investment in line with what was stated in the FDD?
  • Ask how they went about getting a loan for their franchise. Was it pretty easy, or was it challenging?

Maybe they can introduce you to their lender and you can get a similar small business loan from them. Lastly, Libava says:

“Ask every franchisee this question: Would they do it again?”

Think About Your Location

Successful restaurant and store owners will tell you it all comes down to location, location, location. One of the toughest, and most important, decisions a franchisee will make is choosing a location for their new business. Many franchisors will work closely with you to pick the perfect site, sharing insights about what particular site characteristics lead to success with their organization.

However, at the end of the day, the decision is ultimately yours. You’ll need to understand your target demographic and what drives customers to this particular franchise. Then evaluate each location accordingly. Consider details like traffic patterns, parking, nearby stores, and check with the franchisor if you’ll be guaranteed protected territory (i.e. no other franchise can open within a certain radius).

Focus on Service

Buying a franchise gives you a proven model and a clear-cut marketing plan to bring in new customers. However, it’s up to you to define the customer experience. Employee-customer interactions can make or break any business.

Hire customer-centric staff who will go the extra mile to leave an extraordinary impression on your customers. In addition, you need to be realistic about your management experience. If you have never managed a team before, you’ll need training on how to manage people effectively.

Consult a Specialist

The tax rules and contracts surrounding franchises can get quite complex. You should consult an attorney, preferably one who specializes in franchise law, to review your franchise agreement documents and identify any potential red flags.

In addition, an accountant can help you understand the full costs of purchasing and operating the business, as well as evaluate tax considerations. Given the size of the investment you’ll be making, it’s prudent to pay a little upfront for a professional consult.

Don’t Forget About a Formal Business Structure

For franchisees, a formal business structure (like a corporation or LLC) is critical to separate your personal assets from the business. While the exact business structure you choose will ultimately depend on the specifics of your situation, many franchisees choose to become an LLC or S Corporation for more favorable tax treatment. These two entities give you the option to choose pass-through tax treatment. In this case, your business doesn’t file its own taxes; any profits or losses of the business are passed through to your personal taxes.

Many franchisors prefer to sign contracts with established companies (LLC or corporation) rather than sole proprietors, so you may want to incorporate or form an LLC before you sign the franchise agreement. In most cases, you’ll want to incorporate or form an LLC in the state where your business will be located (and not the state where the franchise is headquartered). While you may want an attorney to review your franchise contract and paperwork, you don’t necessarily need an attorney to incorporate.

Other Resources

If you’re interested in exploring a franchise opportunity, there are plenty of resources to help you get started:

Bureau of Consumer Protection: “Buying a Franchise: A Consumer Guide

Small Business Development Center (SBDC)

International Franchise Association

World Franchising

Browse for opportunities and do your homework. Maybe this will be the year you take the reigns and become a business owner.

Franchise Concept Photo via Shutterstock

9 Comments ▼

Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

9 Reactions

  1. Nice job, Nellie!

    Thanks for the shout-out.

    Teamwork: Let’s keep educating today’s would-be franchise owners. The more they know, the better off they’ll be.

    The Franchise King®

  2. Great advice Nellie.
    I would just add to the due diligence; find out whether you can have your own website or whether you have to use a template site on the franchiser’s domain. With online marketing as important as it is these days, having your own web presence can be essential for many franchisee businesses.

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