The Top 5 Questions To Ask Before Buying a Franchise

Investing in a franchise is not a decision to be taken lightly. Many businesspeople hand over their life savings to cover the initial investment, and most businesses will require a substantial amount of time and energy from franchisees.

Lori Karpman, CEO of Lori Karpman & Company, outlined the top five questions to ask before you invest:

1. What are your expansion plans for the next 10 years, and do you have the capital to fund them?
2. What is the franchisee turnover rate?
3. Once I become a franchisee, what kinds of resources and tools will be available to me?
4. Do I get a protected territory?
5. How often do you develop new products or services?

As you work through these questions with a franchisor, you can gather valuable information that will empower you to make the right choice for you and your goals.

“What Are Your Expansion Plans for the Next 10 Years, and Do You Have the Capital to Fund Them?”

Mark Mele, chief development officer at Paris Baguette*, advises prospective franchisees to “Ask questions about all aspects of the business and ensure their strategies make sense.”

“There is no guarantee you will have any return on your investments, so invest wisely,” he added. “Ensure there is financial strength with the franchisor before you make an investment.”

When evaluating opportunities, it may be easy to focus solely on a brand’s long-term plan or its financial success. However, one without the other is far less beneficial to franchisees. Franchise agreements are lengthy; make sure you are agreeing to a plan that is both well-thought-out and appropriately resourced. 

“The last thing you want is a franchisor that does not have the funding needed to grow the brand,” Karpman said. “You want to buy a brand that has a vision and mission that matches your own.”

“What Is the Franchisee Turnover Rate?”

Of course, some level of turnover within a business is to be expected. Make sure you receive a clear representation of this pattern from the franchisor and evaluate whether the rate seems reasonable.

“On average, a franchised brand has a 20% turnover rate per year,” Karpman explained. “People leave for all sorts of reasons — they get ill, retire or just want to get out of the business. But, how many were sold or closed because the franchisee was not making money?”

You want to invest in a business that can retain its franchisees. A lower turnover rate typically indicates that franchisees are happy within the system, feel adequately supported and are able to conduct a profitable business.

“Once I Become a Franchisee, What Kinds of Resources and Tools Will Be Available to Me?”

One of the most widely recognized benefits of franchising is the support and expertise franchisors bring to the table. In exchange for an initial investment and ongoing royalties, franchisees are granted access to the brand’s tools and knowledge.

However, not all support systems are built equally.

“Another crucial part of assessing franchise opportunities is the practical side of running a business. While franchising is a lot different than building a new start-up from scratch, it involves the same basic business management foundation,” Mele added. “You need to think about your staff, working hours, accounting, location, target demographic and equipment maintenance. Keep in mind that franchisees do get assistance, but it’s important to understand the extent of the help the franchisor will provide and what type of extra costs, if any, that assistance will involve.”

Understanding the entire scope of responsibilities associated with the business will give you a more realistic view of how and when the franchisor’s advertised support system and resources will come in handy.

“In the initial training program, you will get lots of tips and resources to use,” Karpman explained. “Once you have been a franchisee for a while, though, what kind of support can you expect on a daily or monthly basis? You want a brand that has full operational and marketing support.”

“Do I Get a Protected Territory?”

Some franchisors are more protective of their franchisees than others. You want to make sure you will be positioned to succeed and not placed in a scenario where another franchisee’s business is draining your own.

“Some brands will put locations really close to each other, and then the two franchisees end up sharing the same dollar, and no one does well,” Karpman said. “You want to be ensured that neither a new franchisee nor the franchisor can compete with you in your market.”

“How Often Do You Develop New Products or Services?”

As brands grow, their offerings should, too.

“When you are investigating franchise opportunities of any kind, you need to be sure you are making sound business decisions. It won’t matter if you are going with a franchise known around the world, like McDonald’s, or one that is a fledgling. The ultimate goal is to make money and begin a successful venture into that industry,” Mele explained. “A good starting point is to look at the track record the franchisor has had in the past. You will want to have someone who knows how to build a business with a solid background and some experience with franchise opportunities.”

With market trends constantly shifting, it is impractical to expect a brand to live on forever without any changes. Whether a brand is two years old or 100, a willingness to innovate and grow is a positive indicator.

“You want a brand that recognizes that it has to keep innovating to move forward and for the franchisees to thrive,” Karpman said.