4 Things You Should Know Before Buying a Franchise

So, you found the franchise of your dreams … now what? You might love everything about the concept, the location or the growth potential, but the truth is that buying into a franchise can be a very complex and time-consuming process. Narrowing your business options is a lot of work in itself, but once you’ve chosen a franchisor, your journey has just begun. Below are some key things to consider about franchise buying that franchisors want every candidate to know. 

The relationship is mutual, not a one-way-street. 

While brands are asking themselves what is this business’ value as a franchise opportunity, franchisees need to ask themselves what is their value as an investor. Many franchisors are looking for what is going to be a long-term, solid investment. Overall, it’s important to understand that you’re entering into a collaborative relationship between two parties that will require compromise and open communication. 

Understand your finances and the finances of the franchisor.

Understanding the financial side of franchising can be intimidating, which is why investing time in research — as is having a clear sense of your own assets as well as those of the franchisor. Much like franchisees want franchisors that have strong proof-of-concept, franchisors want franchisees who have a high level of net liquidity. Franchisors want to be confident that the franchisee can manage the business through the often not-so-profitable startup phase. It is also important to understand that in addition to startup costs and royalties, franchises also charge a franchise fee, which cover a wide range of services. Don’t be afraid to inquire what services are included in your franchise fee.

Know which items are negotiable and which aren’t. 

While many aspects of franchising require you to follow a certain format, formula or business model, not everything is always set in stone. Depending on the franchise, there are certain things that you can and can’t negotiate when investing in a franchise. If there is an opportunity to negotiate your franchise agreement, you will want to do so early, and ideally in the presence of a franchise lawyer. Things like royalties or marketing budgets are often not negotiable, whereas things like contract termination date might be more flexible. Your key to navigating negotiations to find an experienced franchise lawyer whom you trust. 

Read the Franchise Disclosure Document (FDD) carefully. 

Most FDDs are rather lengthy legal documents that are difficult to parse on your own, but they can be much easier to understand if you know exactly what to look for. Some of the most important Items in an FDD include: Item 20, Outlet, Transfer and Franchise Owner Information; Item 7. Initial Costs; Item 19, Financial Performance Representations; and Item 3, Previous Litigation. These will give you the big picture of what to expect from the franchise, including prior legal proceedings, potential amount of money to be invested, the potential amount of money than can be made and the total numbers of outlets, closures and transfers in recent history.