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Perhaps the greatest leap of faith you will ever take is buying a franchise. In most cases, the franchisor is asking you to quit your job and invest a large chunk of money. It is such a long leap of faith that many who are somewhat interested in franchising will never actually take the leap.
The process of buying a franchise typically takes months, and that is for a good reason. There is a lot of due diligence that the candidate needs to do to make sure they are purchasing the right franchise.
There are over 4,000 franchises in 300 different industries; the first step is to start eliminating.
How much can you invest?
And how much are you willing to lose?
Talk to your accountant about your options if they will require financing. There is absolutely no point in investigating franchises outside your budget.
Here is a partial list of questions that will start chopping the list of franchise options down for you.
There are many more questions to ask, but this article will help you get started.
The franchise industry is a federally regulated industry that all franchisors must follow. There are restrictions on what the franchisor is allowed to say. For example, a franchisor or franchise representative cannot make an earnings claim if a candidate asks how much money the average franchisee makes. Their answer may be to ask the actual franchisees directly.
Anything that a franchisor promises can be held against them in a court of law. They can be subject to fines and lose their ability to sell future franchises.
The next step in buying a franchise is the fun part. It’s not as overwhelming as one might suspect. I recommend starting with 4-5 industries that interest you and fit within your budget.
In large cities, franchise shows come around 1-3 times a year. This is a great way to talk face-to-face and feel the company’s vibe.
One of the benefits of attending a franchise show is you can ask the same question to multiple franchisors and do some immediate comparison analysis.
Usually, franchise shows have emerging franchises with brands that are new and most likely not known in your area.
I have developed a list of questions to ask franchisors that you can download for free. And you will want to know how long they tested their concept and in what areas before franchising.
I promise the franchisor will be impressed with your questioning and it will help you make a more intelligent decision in buying a franchise.
The upside of brokers
Brokers are helpful because they can help you navigate the deep waters of franchising. You can take advantage of a broker’s knowledge and experience by asking questions and bouncing ideas off them. When you ask a franchisor a question, you don’t know if you are getting a straight answer or not. With a broker, you hope you are getting the truth, and in most cases, you probably are, but did you know?
Franchisors pay brokers about $25,000-$40,000 to sell a single franchise. Most of the franchise fee goes to the broker. In some cases, franchisors want to sell franchises so much that they give incentives and bonuses that total even more than the entire franchise fee!
Disadvantage of brokers
Brokers can then push the franchises with the highest commissions.
Many websites on the internet have hundreds of franchises to offer. They do not care which franchise you choose. These sites only make money if you request information about a particular area. They will charge the franchisor a small fee and forward your contact information.
Once you have narrowed your search to 6 franchises or less, it’s time to do some more due diligence.
It’s time to speak to someone directly at each franchise. The first meeting is often just a get-to-know-you meeting which can include questions about your time frame, desire to open up a franchise, and background.
They will likely send you an eBook of information and plan for a more extended meeting soon after.
It is also not unusual for the franchisor to ask the candidate to fill out a credit application.
Don’t hesitate to give a broker or franchise your contact info. Buying a franchise should not be, and rarely is, a high-pressure sales pitch. Instead, it should feel like you are entering a business relationship with a coach.
Expectations Form The First Meeting
The first official meeting is an opportunity for the franchisor to open up the hood of their franchise and show you the engine. It’s hard for this process not to sound like a sales pitch. And it is, but it will outline everything the franchise offers. It’s a timeshare presentation with absolutely no pressure.
After this meeting, they couldn’t sell you a franchise even if you begged them.
If, after this meeting, you are still interested in the franchise, they will offer to send you an FDD and ask you to fill out a credit application.
The franchise disclosure document, FDD, has all details of the Franchise Agreement.
In short, FDD explains what is in the Franchise Agreement.
There are 22 items in this contract, and each item covers a different topic in a particular language.
Everything you ever wanted to know about their franchise is in the FDD.
Comparing FDDs is very important and, fortunately not very difficult. All FDDs have their information in the same place.
Please make sure any verbal promises that are not included in the Franchise Agreement are included as amendments.
Strange But True:
To prevent a candidate from making a poor decision, candidates must wait two weeks after receiving the FDD before they can sign it. The date will start when the candidate signs a receipt page. Agreements could be void if the franchisee did not sign a receipt page stating that you received the FDD on a specific date.
Okay, so you are ready for the next step in buying a franchise—validation calls. Ask if you can speak to various franchisees who have been owners for different periods. Remember, this is your opportunity to ask any question the franchisor cannot answer. Also, verify the franchisor’s claims and see if the franchisees agree.
Please don’t be shy because we are getting close to the great leap of faith. Sorry to be repetitive, but I highly recommend that you download these questions; you will see I have a section of questions to ask the franchisees.
By now, you have narrowed your choice to just a few franchises. Go through the questions provided and see which one scored the highest in the areas that are most important to you.
Now that we have narrowed it down to one franchise, it’s time to contact a franchise attorney and have him or her read the FDD. Do not ask an attorney to read an FDD who is not experienced in franchising. The FDD does read very friendly or favorable to the franchisee. That is because you buy the rights to use the brand’s logos and trademarks. Franchisees are representatives. They have the right to operate, sell and grow that franchise, but they must stay within the guidelines outlined in the Franchise Agreement.
In most cases, a franchise attorney might ask for a few modest concessions, which the franchisor may accept or reject.
It’s time to complete the necessary paperwork to acquire the monies to buy the franchise.
This process usually takes between 1-3 months, and it is where many deals die. Why?
We’ve been through so much to get here. What happened?
It’s that excellent leap that just got greater.
So, what if you made it? You took the great leap of faith! What now?
All parties will sign the franchise agreement, and the franchise fee is due. Your fear will be replaced with nervousness, enthusiasm, and excitement. Starting this journey will be something you wish you did years ago.
Don’t eliminate an industry just because you don’t have any prior experience. That is the entire point of buying a franchise. You are buying proven best practices that, if followed, should lead to a profitable franchise.
Does the average franchisee net an income that meets your requirements?
Is the franchise in a recession-resistant industry? There is a reasonable chance that if you own a franchise for ten years or more, you will hit a recession. Luxury items, no matter how small of purchase, get hit hard. Think out of the box. Industries such as painting, handymen, and health services stay consistent during economic downturns.
Be patient. Take your time. Know everything in the Franchise Agreement, and then go for it!