9 Things You Must Know Before You Buy Into a Franchise

Franchises exist on every industry imaginable. They often sell us the credibility, cleanliness and consistency of a product or service that the brand name represents. For many people, owning a franchise is a sure way to buy into a proven business model that provides the recognition and the know-how needed to succeed. Unfortunately, this is not always the case, because not every franchise operates and treats their franchisees the same way; therefore, it is extremely important to take the following points into consideration when buying into one. For almost eight years, I owned and operated a beauty-related franchise from which I learned a great deal on what to do right and what I did wrong. I wish someone would have coached me at the time and made me objectively evaluate my decision. I’m sure it would’ve saved me a lot of time and money, and that’s why I’m writing this article.

There are plenty of excellent franchises out there, but before you buy into one, make sure you follow my advice and save yourself some trouble so pay attention to these 9 things you must know before you buy into a franchise.

  1. Brand name recognition has a price.
    buying a franchiseThe two main things a franchise sells you is a brand name recognition and the know-how to run the business. As consumers, we need to build credibility to trust a business, and that is typically accomplished by branding the name. If you’re buying a franchise that is not known in your geographical region, then you won’t have any name recognition. Therefore, it will take you more time and a lot more money to brand your name in your local market. Ask your franchisor what their expansion plans and marketing plans are in your market. Perhaps they are coming into the area with several other locations and a joined local marketing plan that will benefit you from the start. If that is not the case and you’ll be a lone wolf spending money on your own to create brand awareness and promoting your store, then the franchise name is worthless. You’ll be better off partnering up with someone that has already operated the same type of business you want to open and can bring the know-how, saving yourself many thousands in franchising fees and royalties, or look for a franchise that is well established with a proven track record in your area.
  1. Your franchisor’s goals are not the same as yours.
    different goals
    Even though the franchisor is the creator of your future franchise, your goals and your businesses are not always aligned. As a franchisee, you make money by selling the product or service you offer to a local market. The franchisor makes money by selling the right for you to operate the business and by taking a percentage of you gross sales; no matter how little or how much you make, they always make money. You would think that it is in their best interest to help you increase your bottom line so they can also increase theirs, but surprisingly, many franchisors prefer to invest their resources to keep on promoting the sale of franchises and promoting their own corporate stores than to help their franchisees succeed. In the end, the contract you signed protects them from everything, and they will make money no matter what you do. If you want to close, they have the right to take over the business and the lease, sometimes without even paying you, and if you want to sell, they will make money on the transfer fee, retraining the new owners and hitting them with remodeling costs. That’s why it’s very important to follow the next point.
  1. Other owners are your best guide.
    Before you sign a contract, make sure you call not one or two franchise owners but ten or more. Go see their operations, talk with them face to face and, if possible, try to talk with employees. You’ll be surprised how much people want to talk when they’re happy or unhappy about their franchisor. I personally spent hours sharing my own experiences with potential franchisees and letting them know the reality of the business versus the sales pitch the franchisor gives you. There are many situations that an operating manual won’t tell you how to handle, and your franchisor will conveniently avoid mentioning them.
    Make sure you ask the following list of questions:
  • How are you doing financially?
  • How long did it take for you to start breaking even?
  • How long have your employees been working for you?
  • How much support does the franchisor offer?
  • Does the franchisor allows you to offer input to improve the system?
  • How much autonomy do you have in marketing decisions?
  • Would you consider selling your own operation, and why or why not?
  • Do you have a protected territory?
  • Do you plan to expand into other locations with the same franchise?
  • If you could go back in time, would you get into it all over again?

Listen carefully to what many owners have to say and allow their answers to these questions to serve as your guide on weather it is a good franchise to join or not.

  1. Don’t be the first one.
    I made the enormous mistake of being the first franchisee to open. I was impressed with the numbers that their three local stores produced and figured that if only I could make a third of the sales they were making, then I could make a bundle of money every month on the business. I was told that expected sales were one million dollars a year and that they would only sell five franchises until every one of them were in a good financial position. To my surprise, neither of those things turned out to be true. My franchisor sold 13 franchises in my county in a period of 18 months, flooding the market with competitors. The franchisor didn’t care because they were still making money from the 13 of us, but the growth process was seriously delayed and earnings were disappointing compared to the promised expectations.In addition, if you’re amongst the first to open, you will have no reference to go by. You won’t know if they are a good or a bad franchisor, if the earnings are real, if the brand name and know-how are worth the price, and you won’t know how much the built-out and operating costs will be. Keep in mind that your franchisor is not part of a franchise when they start out, and they haven’t paid the franchise rights or royalty fees, and they don’t buy their products locally, they have no costs on personnel training and they don’t need to compete against other stores with the same name, so their earnings will be completely different than yours.The other problem of being one of the first is that franchises grow fast, and after they have sold a few and have money in their pockets, they will start making changes to the system, the services, the software and they will start hiring designers to give their image a new look. When this happens, you’ll be stuck with the old image. To keep up, you might even be forced to upgrade everything in your store and even do major renovations and build-outs that can be quite costly. My advice would be to look for a mature franchise that already knows what they’re doing.
  1. Contracts can be ambiguous and one-sided; get your lawyer to check it.
    franchise contracts
    Typically, your franchise agreement will be one-sided benefiting the franchisor in every way. There is very little room for negotiation if you really want to get into it, but whatever little room you can find, negotiate it. Even if you can’t negotiate many things, have them define ambiguous phrases, such as “prices in products may increase a reasonable amount yearly.” Have them tell you what “reasonable” means, and have them put a maximum percentage instead. In my case, my main product doubled in price in a period of five years, eating a big chunk of the profit I thought I was going to have for myself at that point. In my eyes, that wasn’t a reasonable increase, but in the franchisor’s eyes, it was. So, clear out any ambiguous language.Also, refuse to pay for their legal fees in case you get into a legal dispute. That will only open the doors for them to bully you legally and force you to comply with any reasonable or unreasonable demands. If your resources are tight, I would recommend you sign up for pre-paid legal services like Legal Shield or something like that. It will give you peace of mind and you won’t be bullied so easily.
  1. Location is key; do your research well.
    franchise location
    You’ve heard the saying before: “Location, location, location.” When it comes to opening a business, the location will make you or break you. Use your common sense, and look around you to see which other businesses are in the area. You may not have the budget to do a deep marketing study, but you can ride on the tail of those who did. Pay attention to your potential neighbors. Having a Starbucks nearby is always a good sign and any other businesses that don’t not compete with you but bring a lot of foot traffic. If you’re selling health drinks, look for a gym close by. If you’re selling pizza, look for a movie theater. If you’re selling waxing services, look for a nail salon. Well, you get the point. At the same time, avoid heavy competitors. If you’re opening a burger joint, make sure you don’t have Burger King right in front of you.

These are things you have to seriously consider:

  • How easy it is to get there; is the place easily accessible?
  • Is there plenty of parking for you, your customers and your staff?
  • Can you do business at all hours in that area or is your schedule restricted?
  • Are you forced by the mall or shopping center to be open at hours that don’t produce any business for you?
  • Is it close to a main artery with lots of foot traffic?
  • Is your sign visible from the street?

Last, if you’re working with a competitive realtor, make sure he/she has access to provide you with all kinds of demographic studies with data from the census bureau with details on spending behaviors of the area. Read those reports carefully, and make sure your product or service is catering to the right audience.

  1. Owning your own franchise doesn’t necessarily make you your own boss.
    shutterstock_663100781-1024x970-e1366827268165
    If you think that by buying a franchise and being the owner and manager of it you are your own boss, you will be very disappointed. Yes, in theory you can come in and out whenever you want, you can hire and fire people and your title will be president, but the reality is that in a franchise, you have to abide by the rules of your franchisor. You will have to learn every trade, and the day someone gets sick, you will have to cover that position. Many days I had to work the front desk as a receptionist, clean floors, paint, fix electrical outlets, warm the wax, do accounting, play psychologist with my employees’ problems, etc. As the owner, you need to make sure the business runs, and in the end, you’re ultimately responsible to make it happen. You will be the one responding to any and every emergency that occurs, and even if you can take a three-hour lunch break if you want, you will also have to respond and work full days Sundays when a key employee fails you.In my case, I was required by the franchisor to send my waxing technicians to a training at the corporate office that would take two weeks and cost me $2000 per employee. This rule seriously restricted me in my ability to hire and fire people because of the high cost of replacement. I would sometimes have to put up with behaviors that otherwise I would have never tolerated just because firing the employee meant losing the investment I had put in them and replacing such an employee was too costly.
    Find out what restrictions your franchisors put on you in terms of employee training and its cost.
  1. Training and supplies might cost you extra if your franchisor is from out of state.
    5-shipping-cost300-large
    If you sell a proprietary product that only comes from the local distributorship of your franchisor, you need to be aware of the shipping costs to you. Operating expenses can blow out of proportion when you need to start shipping palettes of goods out of state. If you’re selling a specific bread your franchisor wants you to use in your burgers, then find out if you can buy from a local distributor or if you need to have it shipped every three days because of its shelf life. Make sure you’re very clear on how much you need of what and how often you need it, and then do a precise calculation of shipping expenses. Don’t compare yourself to the franchises located nearby headquarters because their overhead will always be lower. Talk to the ones in your area to get a better picture.When it comes to training, you also want to consider the distance factor. If your franchisor requires you to train key personnel before you hire them, then you have to factor that in and get estimates on the rotation rate of certain positions. As I mentioned before, it cost me $2000 to train my waxing technicians locally, but for franchisors out of state, they have to spend additionally in plane tickets, hotels, meals and other expenses. If all your products can be bought locally and you are the only one to take in-house training, then you have nothing to worry about.
  1. Selling it can cost you; keep all your documentation organized.
    cost of selling
    I was lucky to sell to a couple from out of the country that needed an investment for visa purposes. I have to say that the process was long and tedious, and I spent many hours gathering a large amount of documents they needed for the accountant that was auditing the business and for their immigration attorneys. Despite the humongous amount of paperwork I was required to present, I was able to gather it all up in a relatively short amount of time because I manage my own accounting and I knew where every form, tax filing, employee record, receipt, sales report, quarterly report, sales report, etc. was. Get organized from the beginning and know personally where everything is. Get a document scanner and keep things digitally filed, manage your own QuickBooks so you know where every penny has gone and how to answer to tough questions, and pay for a payroll company that can store every employee record online. That way when the time comes to sell, you’ll look more credible and the process will be smoother and faster.Just to warn you, most franchises have a transfer fee. In my case, it was 30 thousand. The problem with this for you is that if you’re planning to sell for a price, your buyer will expect the franchising fee to be included in it. This will hurt your bottom line. Also, the buyers might be required to remodel to the new standards and be forced to sign an agreement saying they will spend X amount on improvements. All these extra expenses might scare many potential buyers away and they will want to deduct all these expenses from the asking price. Unless your store is doing really well, chances are you won’t be able to get a lot more than what it cost you to build it out. Find out in detail what the selling or transfer requirements are and do a couple fictitious scenarios to see if it can be profitable to build, grow and sell. If the numbers you come up with are less than what it will cost you to build it and take it to a break even point, you might be better off buying a franchise that’s already running with positive numbers from another franchisee and save yourself many headaches and money.

If I were to do things all over again and wanted to get into a franchise, I would do my research well and purchase an existing promising franchise that’s already running from someone that didn’t estimate their numbers well and has no more operating capital. Then you can snatch yourself a really good deal, save yourself the months of construction, permitting, etc., and focus all your attention and capital into doing good marketing.

I believe any business can be a good business if you market it right and put all the right pieces together. If you’re now looking to get into a franchise, I hope this advice helps you in some way. I wish you much luck.

As for myself, even though I would never buy into another franchise, I unavoidably think like one. I believe in having written duplicable processes that run the business and believe that I need to offer my customers in any industry a consistent level of good service and professionalism. All the best.

Carlos Maldonado
carlos@realestatemiamilife.com

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