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I’m a bit skeptical about franchises. Don’t get me mistaken; I have seen a lot of success with franchises. However, as all of us know, the world is not perfect, and before jumping into a franchise, there are a few things I like to recommend researching and considering.
1. Visit existing locations
Let’s start with the obvious initial homework. If you’re buying a franchise with physical locations, it’s essential visit as many of them as possible. Keep in mind that the franchisor may have advisable that you just visit specific locations. While it’s best to visit the suggested locations, it’s best to also visit others.
2. Notice the differences between brands and properties
When visiting franchise locations, it is necessary to listen to many details. Look for consistency. If you see different logos, different store designs, or, in the case of food franchises, different menus, or, in the case of service-based franchises, different offerings, be sure you ask the franchisor about these discrepancies.
Real estate decisions also matter. If a brand relies on impulse visits quite than destinations, visibility is key. If the locations are in run-down shopping centers with poor visibility, those businesses are prone to struggle.
Also, if the locations are not well-maintained, do not have positive online reviews, or have had bad experiences, that is not a good sign. Remember, even if you do not have any direct business ties to these other franchises, you are all representing the same brand. (*5*), it is necessary to thoroughly take a look at these other locations.
3. Franchisor verification
To research a franchisor, start by reviewing the franchise disclosure document and then check with current and past franchisees. While the franchisor may provide some contacts, it’s key to seek out others to independently gain different perspectives.
Key questions include their experience with the franchisor, plans for additional locations, and actual sales in comparison with expectations. If possible, check with franchisees from closed locations to know potential issues.
Difficulty connecting with franchisees could indicate a confidentiality agreement that would prevent open communication. Such agreements might be a red flag that the franchisor is probably not transparent about its operations.
4. Demographics and construction costs
You also must fastidiously consider what demographics are advisable for the franchisor. If the franchisor has already figured that out, that worries me. It would even be best to make sure the franchisor clearly understands how much the buildout will cost and what their utility requirements are.
Most franchisors gives you a cost range that may vary significantly. So you really want to make sure you do your homework and gather a team of experts to assist and confirm.
5. Franchise Agreement
Once you have done your homework, visiting existing locations and talking to current and, if possible, former franchisees, move on to the franchise agreement. This legal document mustn’t be taken calmly.
As with all legal agreements, I like to recommend consulting with a lawyer who specializes in your specific industry. There are lawyers who specialize in franchise law. I like to recommend using one of them for this process. While it should cost you money, it will probably prevent from a situation you do not understand.
When signing a franchise agreement, it’s essential understand the agreement from top to bottom. For example, it’s essential know what happens if you do not find a location inside the time period set forth in the franchise agreement. Will you get an extension or lose your initial franchise fee? You must know if you have any territory production. Can the franchisor sell one other franchise to someone who can open one nearby? Most franchises will come with some radius protection, but I’ve seen some franchises not offer it. Even if protection is provided, it still is not enough to forestall the franchise from becoming saturated in the trade area.
In addition, I have seen franchisors retain prime territory for their corporate stores and sell second- or third-tier markets to franchisees. If this is the case, you are essentially competing with a franchisor who has higher territory than you.
It is necessary to avoid surprises, and the only technique to do this is to assume nothing, ask questions, and do your due diligence. If you do every part accurately the first time, you might be much more prone to turn out to be a multi-unit franchisee. Remember, do not be embarrassed if you do not know the answer to something. It’s higher to ask a query than to regret not asking.