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A Consumer’s Guide to Buying a Franchise

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First Contact With A Franchisor. Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs. Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources. A broker also may help you finish applications and the paperwork to complete the sale.

Brokers often work for franchisors, and are paid only if a sale is made. That may be true — or not. Ask how many franchisors the broker represents. A broker who represents only a few franchisors will give you limited suggestions. Some franchise brokers may claim they will suggest only those franchises that meet certain standards. You may think this means that your risk is limited because the broker weeds out poor investments.

In fact, some brokers represent any franchisor willing to pay them a commission for a sale. Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned down.

Some brokers earn a flat fee regardless of the price of the franchise they sell. Others earn a commission based on the cost of the franchise. These brokers may steer you toward a more costly franchise to increase their commission. Ask who pays the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission.

To convince you to buy a particular franchise, a broker may talk about how much money you can make. These claims may not be true or can be misleading. Or the claim may be based on outdated industry data. In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far less. Talk to them, rather than relying on information from the broker alone. Ask about their experience with the franchisor. Purchasing a franchise is like any other investment: Is it seasonal or evergreen?

Could you be dealing with a fad? Does the product or service generate repeat business? How many franchised and company-owned outlets are in your area?

Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies, including competing franchises, sell similar products or services at a similar price? Are those companies well established or widely recognized in your community?

Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off?

An established franchise with a well-known name — and good reputation — is more likely to draw customers than a relatively new or unknown franchise. What training and continuing support does the franchisor provide? Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field? Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience or training similar?

What do current franchise owners say about the quality and usefulness of the training they received? Many franchisors that operate well-established companies have years of experience selling goods or services and managing a franchise system.

Some franchisors started by operating their own business. Find out how long the franchisor has managed a franchise system. Does the franchisor have enough expertise to make you feel comfortable? If the franchisor has little experience managing a chain of franchises, take promises about guidance, training and other support with the proverbial grain of salt. In fact, a franchisor that grows too quickly may not be able to support its franchisees with the services it promises them. Are they sufficient to support you and all the other new outlets the franchisor plans to open?

Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for — and get — a copy of the FDD once the franchisor has received your application and agreed to consider it. The franchisor may give you a copy of its FDD on paper, via email, through a web page or on a disc.

The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you, and keep a copy for reference. Here are some key sections of the FDD:. Item 1 tells you how long the franchisor has been in business and its likely competition. It also lets you know if there any legal requirements unique to the franchised business, like a requirement that you get a special license or permit. This will help you understand the costs and risks you will take on if you purchase and operate the franchise.

Item 2 identifies the executives of the franchise system and describes their experience. Item 3 lists important information about prior litigation — whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct.

This item will tell you whether the franchisor or any of its executives have been held liable for — or settled civil actions involving — the franchise relationship. If there have been many claims against the franchisor, it may mean the franchisor has not performed according to its agreements.

Or it could show that franchisees are dissatisfied with its performance. Item 3 also should say whether the franchisor has sued any of its franchisees during the last year.

That disclosure may indicate common types of problems in the franchise system. Item 4 discloses whether the franchisor or its predecessor, affiliates or any of its executives have been involved in a recent bankruptcy. Consider having an accountant review the required financial statements too. These items describe some of the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases or rentals.

It also explains ongoing costs, like royalties and advertising fees. In addition, ask or find out about:. It may take several months to start your business, and it may take more than a year to break even. Some franchises never break even. Estimate your operating expenses for the first year and your personal living expenses for up to two years. Compare your cost estimates for the franchise with what other franchisees in this system and competing systems have paid.

An accountant can help you evaluate this information. You may be able to do better with another franchisor. These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet.

If the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers by establishing their own outlets or selling through the internet, catalogs or telemarketing. Talk to the franchisor and current franchisees to get answers to your questions.

Franchisees are often required to contribute a percentage of their sales to one or more national, regional or local advertising funds. Ask the franchisor what advertising it has done and what is being planned. Ask whether franchisees have any control over how advertising dollars are spent, and if all franchisees and company outlets contribute equally to the advertising funds.

Find out if the franchisor gets a commission or rebate when it places ads. If there is a rebate, who benefits — you or the franchisor? If they buy their own advertising, do they get a rebate or discount on their advertising contribution? New franchisees typically count on the franchisor to provide all the business and operational training needed to run a successful franchise.

Check Item 11 for information about:. The summary acts as the first impression of your presentation. A good place to look for the information for this section is Item 1 of the FDD. Provide an overview of the franchise and its history to the lender. This section can be combined with the company description.

Again, Item 1 of the FDD is where you will find much of the information you need for this section. Item 16 will also be helpful in discussing what you will and will not be able to sell as a franchisee of a particular franchise system. Use this section to prove to the potential lender that you are not jumping into a business venture on a whim.

Concentrate on the specific area market in which the franchised business will be located. The territory description in the FDD Item 12 will help you to a point. Give a brief discussion of the following: This section provides a look at the people who will be responsible for the day-to-day operation of the franchise, particularly you as the owner.

Is this venture going to be a sole proprietorship or will there be multiple owners? Explain if you will be involved day-to-day with business operations, or will be acting as an absentee owner.

For yourself and all of the others with an ownership stake, if applicable, detail all business qualifications. Stress any and all experience even if volunteer that is relevant to being successful in the future with the franchise operation. Item 15 of the FDD will help with explaining the managerial obligations of the franchisee. Use FDD Item 11 to your advantage here. Also, it provides a description of the training you will complete before opening.

Often marketing and sales courses are part of required training. This is the meat of your business plan. Give the lender the big picture of your financial situation as well.

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To get the money you need to open a franchise, you will need a solid business plan. A business plan will also guide you in staying on track as your franchise grows. Creating a Business Plan for Your Franchise. August 3, Guide to Buying a Franchise; Home-Based Franchises; Information for Franchisees; International Franchising;.

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The process of developing a business plan forces you to anticipate every detail of your new business and to address any issues before moving forward. Plann. Jan 26,  · How to Start a Franchise Business. by: Angelique O'Rourke Franchises. A lot of people are drawn to franchising. Sandwich Shop Franchise Business Plan; Thinking about Buying a Franchise? Consider These Pros and Cons; Video: Joel Libava, /5(9).

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How to prepare a business plan for a franchise. The Business Plan explains what you hope to do, how much money you need to do it with and how you propose to pay the money back. Anyone who's thinking about starting a new business is going to need to create a business plan. Why? How To Create A Business Plan. By: a franchise, your business plan will be a little.