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What to Ask Before Buying a Franchise (Checklist)

Mar 31 2017

If you’re considering buying your own franchise, you probably have tons of questions running around in your mind; questions that can make the difference in success, or failure, of reaching your business goals.

To help give you a starting point during the decision making process, here is a checklist of 20 questions to ask before making the leap into franchising:

  1. How long has the company been in existence before it started franchising? Was it specifically set up to franchise?
  2. What is the company’s financial position? You should check accounts for at least the past three years. Can you get trade or bank references?
  3. Can the franchisor show you any figures or net profits of one or more of its existing franchisees, and can you personally check the figures with the franchisees themselves?
  4. What are the criteria to be selected as a franchisee?
  5. As a franchisee, what are your obligations? Are there any operational restrictions on pricing or use of suppliers?
  6. What is the nature and extent of the rights that will be granted to you?
  7. How many franchised units are currently in operation? Are there also company owned units in operation?
  8. Does the franchise agreement have a termination clause; if yes, what will it cost you? Can you sell your franchise?
  9. Does the franchisor have a reputation for honesty and fair dealing among its franchisees?
  10. What kind of assistance will the franchisor provide? Will it involve management and employee-training programs, advertising campaigns, credit and merchandising ideas?
  11. Has the franchisor complied with federal and state franchise laws?
  12. How much operating capital will you need upfront to purchase and operate the franchise until profits are sufficient to sustain the operation?
  13. What are the initial and ongoing fees? Are there any other hidden costs?
  14. Will you get the exclusive rights to the territory for the length of the franchise period, or can the franchisor sell a second franchise in your territory? If the answer to this question is “yes,” what is your protection against the additional franchise?
  15. Have any franchised units failed during the past 12 months? If so, what were the reasons?
  16. Is the franchisor a member of a reputable franchise association? Have they ever been refused membership?
  17. In the event of a dispute between the franchisor and the franchisee, how will it be dealt with?
  18. What is the procedure for terminating the agreement, and what are the consequences of doing so?
  19. How is the communication between the franchisor and franchisees? Is it possible to talk freely to existing franchisees?
  20. What are the franchisor’s long-term plans for the future of the business?

 

Though many surveys show that franchised businesses are less likely to fail when compared to other new businesses started each year, it’s still important that you investigate any franchise opportunity very thoroughly.

The checklist above can serve as a starting point for your franchise opportunity investigation.

If you can get the answers to each of these questions, and those answers are satisfactory, then you are probably on your way to becoming a proud new franchise owner.

 

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Joshua Watkins

Mr. Watkins is the Managing Member at Watkins Law Firm, LLC.  His legal practice has primarily focused on working with private companies as general counsel. As general counsel his duties typically include an array of tasks such as: in-house day-to-day activities, advising the company’s board of directors on their oversight responsibilities, planning and preparing complex corporate transactions, commercial litigation, tax planning, oversight of the corporation’s compliance with federal and state regulations, legal budget management, and specialized outsourcing of legal matters to other counsel when appropriate.

When counsel to emerging start-up companies, Josh often brings critical expertise in the many types of capital formation activities, including entity and structure choices, fundraising processes, and securities compliance.

Website: watkinslawfirm.com/index.php/attorneys/joshua-m-watkins
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