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What You Should Know Before Buying a Franchise

What You Should Know Before Buying a Franchise

Every day, new small business owners and entrepreneurs buy a franchise and get set up with resources that they expect to be able to use to dominate a sales territory. Even though they may show up with the best intentions and commitment, owning a franchise of an established brand doesn’t guarantee success. Buying a franchise is anything but a hands-off business or passive income.

A franchisee has to wear a lot of hats. You’ve got to be comfortable – if not, highly skilled – in aspects of customer service, sales, software, marketing and ads, and more. You will have to adapt, learn quickly, and be willing to put in the hours. For people who aren’t experienced or are uncomfortable with an aspect of the job, you’ve got to be ready to put in the work.

The franchise is not a business that’s going to run itself. You’ve put in the money, now you’ve got to put in the time. Doing so can reap major rewards, but only if you’re dedicated to being successful.

Here is what to know before buying a franchise.

Read the Contract

Franchise agreements can be quite complex. Do not sign a contract like this without reading it first and going over it with a lawyer. If there are things you disagree with, you may be able to negotiate. Negotiation becomes more likely if you show up with financing in hand and are ready to get started immediately.

However, negotiation varies from franchise to franchise. Furthermore, a franchisor doesn’t have an obligation to renew. This is a big thing to consider, so consult with a franchise lawyer before you take any actions.

You Aren’t Buying a Business

Buying a franchise is not the same as buying a business. It’s a licensing agreement. It allows someone to operate a business under a certain brand for a specific period of time. It’s a contract with a definitive end-point usually.

This means that the contract can be terminated. At the end of one’s tenure, a franchisee can be let go and the franchise can be passed off to someone else.

Does the Model Work?

The advantage of a franchise is that you’re buying into a business model proven to work. There’s an audience for it. You have the assistance of a franchiser with their help in branding, management, mentorship, and training. If a brand hasn’t proven a model works, you might not be able to verify whether there’s an audience for a given business. An argument could be made that you’re better off starting your own business than buying into someone else’s unproven franchise.

You Have Guidelines to Follow

A franchise is like being a business owner, except you’re still expected to adhere to certain ways of doing things. A franchiser needs to protect their brand and ensure uniformity across all locations. For this reason, certain policies and processes must be followed. Failing to adhere to the manual and guidelines provided could mean you losing business, revenue, and having your contract terminated.

Talk with Other Franchisees

If you’re interested in a specific franchise, ask the franchisor to speak with other franchisees. Discover what their experience is like. Ask them about problems they’ve encountered and what it’s like to deal with a franchisor. You don’t want to invest in all this effort to help a franchisor franchise and grow their business when you know you’re going to be hit with a dozen problems once you’ve signed.

You Have a Financial Risk

There’s a buy-in cost to a franchise. There’s also a split in revenues. A franchiser relies on the franchisee and vice versa. Each has to do their part to succeed. Furthermore, there are local regulations, competition, and other things out of your control, i.e. pandemics and supply chain problems.

As demonstrated, there are risks to running a franchise. You may need to put together more money. You may discover a market doesn’t exist for the type of products you’re selling. A lot can happen, so always be prepared.

Understand the Numbers

When franchising is done wrong, a franchisee can work their butt off for what ends up being equivalent to just above minimum wage. That’s not what you want. Ask your franchiser the numbers on what their best franchisee made last year. Find out what their worst franchisee made as well. Determine for yourself what you think is possible based on the market and your understanding of your skill set.

Set Aside Ego and Creativity

The most successful franchisees are those who know how to follow the system in front of them. Creativity and ego should be taken out of the equation. A franchiser wants to see success in revenues. There isn’t any room for experimenting with products or the look of a location.

Some franchisees also end up clashing with their franchiser when they claim a franchise as their business. The argument is that they should be allowed to run it the way they want. However, a franchise agreement is a partnership and not an equal one. Your franchiser is your boss, so you follow their guidelines and reap the rewards.

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by Brian Perry // Brian Perry is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.