So you've decided to buy a franchise. What do you need to do to become a franchisee? From reviewing franchise documents to selecting the right type of system, keep these tips in mind when considering franchise ownership.
Identify the best franchise system for you
There are thousands of franchise systems around today. The choice can be daunting. Some are better than others. The type of franchise you choose should be a decision that plays on your strengths.
Spend time reviewing the various industries and trends. Keep in mind that just because something is "hot" today does not mean that it will be tomorrow. If you have experience in a particular industry this is usually a good place to start your search. Also, be sensitive to the local nature of the market; what works in Texas may not work in Michigan.
You may want to consider using a franchise coach to help you understand the skills needed to succeed and identify potential best fits. However, make sure you understand how these coaches are identified and that your interests and theirs are aligned.
Decide between buying a new franchise or an existing franchise
As a franchisee, you can typically purchase a new unit or buy an existing location from a current franchisee. There are advantages and disadvantages in either scenario.
The advantage of buying a new unit is that you have greater control over how and where your business will operate. You get to choose, with the consent of the franchisor, the exact location of your business. Similarly, you get to make all the business decisions like hiring staff, finding the right suppliers, and hiring contractors. A disadvantage of buying a new franchise is that you take on a greater risk that the business may not be profitable. Unlike buying an existing franchise, you will not have any actual sales data to evaluate prior to opening. You cannot piggyback off the success of a prior franchise owner.
The advantage of purchasing a franchise from an existing franchisee is that you can more accurately predict the profitability of the business. The seller's books will have lots of data that you can use to evaluate the franchise. Also, the person selling the franchise can stay on for a limited time to show you the ropes of the business. One downside to buying an existing franchise is that there may be legacy and goodwill issues, such as disgruntled staff or poor customer perception of the business.
Review the Franchise Disclosure Document
The Franchise Disclosure Document is one of the most important franchise documents that you will read. The Disclosure Document covers a breadth of information such as franchise fees, territory location, non-compete agreements, and termination rights and obligations, just to name a few. The Disclosure Document will also have the form franchise agreement.
State and federal law mandate that the Franchisor provide the Disclosure Document to you prior to signing the franchise agreement. In Michigan, the Disclosure Document must be provided 10 business days before signing of the agreement or payment. It is critical that you review the Disclosure Document and franchise agreement so you understand how the business works and the risks involved. Franchise documents are heavy reads and you should consider seeking appropriate professional help to understand your rights and obligations. For more information about Michigan-specific Franchise rules, the Michigan Attorney general has an excellent resource for prospective franchisees.
Hire the right franchise professionals
Make sure you have the right professionals in place before you invest in a franchise system. We recommend that you have someone familiar with business valuations (typically an accountant or CPA) and a franchise attorney.
An accountant or CPA will help you assess any projections the franchisor may have provided to you. They will also assist you in looking at the books of an existing franchise to evaluate any issues.
A franchise attorney is critical for your success. Many franchisees jump into a purchase without understanding the risks. Only later do they find out that a particular franchise agreement provision, such as a non-compete clause, will have severely negative consequences. Your attorney helps structure your business to reduce liability, and in certain cases, negotiate changes to the franchise agreement where feasible.
Interview existing and former franchise owners
Interviewing existing franchise owners is one of the most useful tools for any prospective franchisee. Interviewing these operators will give you a look under the hood about how well or poorly a franchise runs. What type of support does the franchisor provide in practice? How have disputes been resolved? If there was one thing you could change about how the franchise is run, what would it be? Go beyond just simple questions.
We also recommend contacting former franchise owners. Whether they left the business on good or bad terms, try to figure out if their reasons for exiting are a cause for concern. You can use their experience as an opportunity for success in your own situation.
Determine how you will finance your franchise purchase.
Purchasing a franchise is no small financial undertaking. To own a franchise, you need to pay a substantial sum for the initial franchise (if starting new) or transfer fee (if you are purchasing an existing location). Additionally, you need tens of thousands of dollars in the first months as your business starts. While many franchise owners want to buy a franchise with no money down, the reality is that you need to explore all options.
If you are looking to finance with a loan, make sure to work with a lender who is familiar with SBA loans and franchise acquisitions. The Small Business Administration can often provide a great opportunity for financing your franchise acquisition. The SBA maintains a directory of approved franchises to assist lenders in providing potential franchisees with SBA loans.