Purchasing a franchise is an attractive option for people who are looking for new challenges or who are unable to find work in their previous careers. Becoming a successful franchise owner requires a significant investment of money and time. Before you sign the franchise agreement, here are some important things to consider:
1. REPUTATION OF THE FRANCHISE
A franchise that is already well-established in your area is more valuable than a start-up franchise or one that is new to your area. Keep this in mind when evaluating whether the franchise fees and royalties you will be required to pay to the franchising company (the “franchisor”) are fair.
2. THE AMOUNT OF YOUR INITIAL INVESTMENT
You should review the franchise disclosure document (FDD) carefully to determine what else, besides the initial franchise fees, you will need to pay the franchisor (for supplies, equipment, etc.) and what the FDD estimates you will pay to vendors before you can open your franchise.
3. EXCLUSIVITY
Most franchisors will grant you an exclusive area to operate without competition from the franchisor and its other franchise owners (the “franchisees”). You should be wary of any limitations that could limit your profitability – such as a reduction in your exclusivity if the area’s population increases above a certain level.
4. SATISFACTION OF THE FRANCHISEES
Some franchisors treat their franchisees poorly (e.g., failing to provide enough support or finding ways to increases their royalties at the expense of the franchisees’ profits). Speaking with existing and former franchisees, and investigating any litigation between the franchisor and its franchisees, will allow you to gauge whether the franchisor will help or hinder your business.
5. CHANGES TO THE FRANCHISE AGREEMENT
Most franchisors will not agree to dramatic revisions to their franchise agreements (if it does, this may be a red flag that it does not have a good business model in place). However, you may be able to get the franchisor to agree to make certain changes that will improve your deal, such as increasing your exclusive area or providing additional training.
6. CHANCES OF SUCCESS
Is there a sufficient demand for the franchisor’s products and a lack competition within your area? Have you chosen a prime location with proper zoning approval? Do you have the necessary experience and qualifications to operate the business efficiently? Answering yes to these questions will improve your chances of success. For more information, please contact Mark W. Klein (mklein@brodywilk.com).