Buying a Franchise, Due Diligence

Consider the position of the franchise in its industry and the maturity of the industry.  Read about the industry by searching for information on the internet.  Is the industry growing, mature, or perhaps even declining?  The instant print industry has been shrinking for several years, but there are still companies trying to sell printing franchises.

Franchises that offer pack-and-ship, tax accounting, and pizza restaurants, for example, are all in very crowded territory and the franchise offered must truly offer something extraordinary to stand out.  There are many "me-too" franchises on the market. 

Carefully study Item 7, Estimated Initial Investment, in the Franchise Disclosure Document.  Does the cost of opening the franchise seem reasonable?  Show the numbers to someone else, who has opened one or more businesses, and get their feedback.

Consider several different franchises, in the same and different industries.  Gather marketing information from the internet and from the franchisors themselves.  Searching for "franchises for sale" on the internet will bring up many sites that offer information about franchises for sale. 

Franchisors are required to provide you with a list of current franchisees, when they give you the Franchise Disclosure Document.  And, they must give you a copy of the document "early in the process" when you ask for it, unless they decide that they no longer want to consider you as a franchisee. 

Speak with a few franchisees and ask them about the training they received, how supportive the franchisor is, how their business is doing, and if they would buy the franchise again.  Randomly select those you wish to contact to get a good cross section. The franchisor is not supposed to direct you to a select list.

Here are a few additional things to consider when buying a franchise:

--What is the franchisor's position in their industry. Be wary when anyone says "We have no competition."  There is always competition, or there soon will be.

--What are the requirements to participate in the business? If you can't turn it over to a manager, once it gets going, you may find that you have bought yourself a job.

--What is the size of the territory? It should be large enough for the franchisee to be successful, but small enough that the franchisor can realize its potential.

--When buying from a smaller franchise, sometimes they are willing to negotiate or even finance the franchise fee. Ask about this.

--What is the lease exposure? A $35,000 franchise fee does not seem so scary when compared with a $300,000 lease that you must personally guarantee.

--How many employees are required? Being an employer is a new experience for many franchisees.

--What must you buy from the franchisor, and how much margin does he have in it? This is a required disclosure in the FDD, so look for it.

--Are the ingredients, inventory items, or equipment at the high-end of the price range in the industry? You want to be sure you can be competitive.

--What is the advertising program? How much of it will benefit your location?

--And, it is a good idea to spend some time searching on Google to see what type of information there might be about the franchisor on the Internet.  If you find "bad press," you might move to a different opportunity.

More information can be found at:  www.biltmorefranchise.com