If considering the purchase of a franchise (or any other business for that matter), you\u2019ll soon encounter the term \u201cdue diligence.\u201d<\/p>\n
It\u2019s defined as, \u201ca comprehensive appraisal of a business by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.\u201d<\/p>\n
It\u2019s important, too, when buying a franchise. Startup expenses can be considerable. To begin, you\u2019ll incur professional fees for an attorney and an accountant. Depending on the kind of business you\u2019re buying, there may be costs for business licenses, insurance, inventory, equipment, rent, signage, and worker training, not to mention building out a store or office if opting for a brick-and-mortar operation. While not always required, purchasing your own real estate can be a significant, separate expense.<\/p>\n
Other initial expenses are those associated with your grand opening including advertising and promotional costs. And, after you open, you\u2019ll have to contend with maintenance, rent, salaries, supplies, utilities and other ongoing expenses \u2014 including interest if you have a loan.<\/p>\n
Now consider the franchise itself. Most franchise fees run from $50,000 or $75,000 to $200,000 or more to get started.<\/a> These cover the right to use the brand name, logo and more. Your commitment can be lengthy. Some franchise agreements run for as long as 20 years.<\/a> Ongoing royalties usually range from 4 to 8 percent of gross revenues and often include a regular assessment for advertising (2 to 4 percent).<\/p>\n Another financial factor? Your opportunity cost. If it\u2019s a business that requires purchasing land and building a structure, you could be “out of pocket” for up to a year (or more) before any revenue rolls in!<\/p>\n Beyond dollar and cents, your satisfaction is also at stake. A franchise often represents your dream to own a business and operate it your own way \u2014 subject, of course, to the rules of the franchising organization.<\/p>\n In short, it\u2019s an opportune time to look closely before you leap. And, that\u2019s where due diligence comes in. Here are some best practices that will guide your efforts:<\/p>\n \u2022 Interview current franchise owners.<\/strong> You\u2019ll want to ask them how are their business is doing? How long did it take to turn a profit? How supportive is the franchising organization? And, what\u2019s their work-life balance? Answers to these questions (and more!) will help you decide whether to pursue a franchise opportunity.<\/p>\n \u2022 Reach out to former franchisees.<\/strong> No longer \u201cpart of the system,\u201d previous franchise owners will be a key source of information\u2014and perhaps more candid insights. What’s their opinion of the parent company? Why did they sell their franchise? And, did the franchisor offer any assistance with an “exit strategy?” After all, someday down the road you may be looking for similar help.<\/p>\n \u2022 Visit the franchisor\u2019s headquarters<\/strong>. This is your chance to learn first-hand about any support systems in place to help franchise owners. Equally important, you\u2019ll gauge the franchisor\u2019s interest in you, their responsiveness and professionalism. It\u2019s a great time to determine if you\u2019ll be a good fit for them and if they\u2019ll be a good match for you. As part of this key step in the due diligence process, you’ll also want to arrange visits to several franchise locations.<\/p>\n During your visit, be sure to consider the culture of the operation. Just like any organization, each franchising company has its own culture. Some are highly ridged, accepting of little input from franchise members and adhering to very strict policies and procedures. Some buyers welcome the structure while others will feel comfortable in a more open, flexible environment where franchisees are given more latitude to make some decisions on their own.<\/p>\n Another important consideration is the franchise leadership team. Have they spent time \u201con the front lines\u201d working in the industry they represent? Or, or are they strictly administrative professionals who know a lot about franchise documents and compliance but have very little understanding of the business their owners are engaged in on a day-to-day basis?<\/p>\n \u2022 Review franchise documents personally.<\/strong> Should you engage an attorney to review the Franchise Agreement (and Franchise Disclosure Document), even when most franchisors say they\u2019ll allow no changes to the documents? Many would advise doing so, especially if you enlist one who has who has seen lots of Franchise Agreements. They can tell you if the agreement is standard or point out anything that might be unusual or severely restrictive. It doesn\u2019t mean you won\u2019t sign the agreement, but it will help you understand what you are signing up for.<\/p>\n Of course, you won’t want to leave it to your lawyer alone to evaluate these documents. Read them from cover to cover. Take notes. Ask questions. And, gain a complete understanding of franchise royalty rates, territorial rights and more. If you join the system, these are terms and conditions you may be living with for years, if not decades!<\/p>\n \u2022 Compare a franchisor\u2019s documents to others.<\/strong> If considering several franchise opportunities, weigh the Franchise Agreements and Franchise Disclosure Documents against one another. Even if evaluating only one opportunity, see if you can obtain documents from other systems \u2014 perhaps through your attorney. Doing so will help you determine which terms are most favorable \u2026 or if any are unusual enough to raise caution flags.<\/p>\n \u2022 Examine the franchisor\u2019s Financial Statements.<\/strong> These will be included as part of the parent company’s Franchise Disclosure Document. If you’re not thoroughly familiar with reading and understanding Financial Statements, enlist the assistance of an accountant \u2014 preferably one who\u2019s experienced with small businesses or, better yet, with a franchised operation.<\/p>\n \u2022 Consider all franchising opportunities.<\/strong> Even you\u2019ve dreamed of owning a specific franchise, it’s smart to evaluate other options. Another similar franchise organization may offer better support. A once-promising industry may be in decline with diminishing prospects for growth, giving you pause. And, with thousands of franchises from which to choose, there are likely more than a few you\u2019ve not yet considered. Some of the more unusual ones specialize in anger management, beef jerky sales and crime-scene cleanups!<\/p>\n A final tip? Take your time and use the due diligence process to find out as much as you can about the best way to fulfill your dream of owning your own business. By touching all the bases early on, you\u2019ll gain confidence that your ultimate franchise purchase decision is the one that\u2019s best for you!<\/p>\n","protected":false},"excerpt":{"rendered":" If considering the purchase of a franchise (or any other business for that matter), you\u2019ll soon encounter the term \u201cdue diligence.\u201d It\u2019s defined as, \u201ca comprehensive appraisal of a business by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.\u201d It\u2019s important, too, when buying a franchise. Startup expenses…<\/p>\n","protected":false},"author":2,"featured_media":3690,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27,16],"tags":[],"class_list":["post-3689","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-franchise-how-to","category-starting-a-business"],"_links":{"self":[{"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/posts\/3689","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/comments?post=3689"}],"version-history":[{"count":1,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/posts\/3689\/revisions"}],"predecessor-version":[{"id":5340,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/posts\/3689\/revisions\/5340"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/media\/3690"}],"wp:attachment":[{"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/media?parent=3689"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/categories?post=3689"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.allegramarketingprint.com\/franchise\/wp-json\/wp\/v2\/tags?post=3689"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}