What You Need to Know Before Buying a Franchise

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What You Need to Know Before Buying a Franchise

In times of economic downturn, many people look at the option of starting their own business, with franchising becoming a popular alternative.

But as with all new ventures, there are risks involved and there are a number of key questions you need to ask yourself before plunging in.

Do I have the right location and market?
Take a look at the equipment or services you will be selling. Is there a demand for these in your proposed area?


 

What is the upfront cost?
Do you have access to the capital required to invest in your proposed franchise?

What other fees are involved?
There may be extra costs if you need to lease land, equipment or property to start up your business. What about legal costs, bank costs, royalty costs?

How does the franchisor make money?
It is in your best interests to find out how the supplier of your franchise makes money. It could be the sale of the franchises, or perhaps by providing you with services, or simply by owning their own franchise.

 


What are the restrictions regarding suppliers?
Must you buy supplies from selected sources? If so, are these likely to be more expensive or less reliable than other potential sources?
What kind of regional protection is provided?
Are there restrictions on how many franchises can open in selected areas? Get these aspects clarified in writing before signing up.
Are there opportunities to build an empire?
While you will not want others to open a franchise in your selected area, you may want to build up your own chain of franchises. Is this allowed?
What’s the failure rate for franchises?
How many franchises fail in the first year or so? Are the failure rates higher or lower for your selected franchise, and are the statistics better or worse in your selected area?
How many franchises sell out each year?
What’s the turnover rate for your selected franchise? Franchises that are sold are not necessarily reflected in the statistics for failures and indeed, many successful franchises are sold out.
What’s the value for a re-sold franchise?
While looking at the proportion of franchises sold out, assess the value for those franchises re-sold, are they typically sold for a profit or loss?

How can I get out of the deal, if necessary?

It may sound negative, but what are your options if your dream business doesn’t pan out right? Are there penalty clauses if you want to sell out? Are you allowed to sell to anyone or do you need to sell through the franchisor?

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