When you’re considering buying a franchise, there are tons of things you need to do. Buying a franchise can be fun, but it can also end up as a complete nightmare if you don’t know what you’re doing.
Some franchises end up getting tons of lawsuits against them when they’re misrepresenting what’s actually going on with the business.
That’s why it’s incredibly important that you find out what is important to you. Here’s a brief overview of how you buy a franchise:
Narrowing it down
The first step in buying a franchise is narrowing it down to some industries you may have an interest in. While you could buy a gas station, opening up a gym is also a possibility.
Prioritizing what’s important to you and your lifestyle is key in making sure your franchise endeavors don’t end up a catastrophe.
If it’s important for you to not smell like greasy chicken after a day at the office, Chick-fil-A isn’t for you.
Working with a franchise strategist
While it’s optional to do so, I generally recommend it. Work with someone like myself who has experience in screening franchises.
There are thousands of franchises out there, and there are many that would be bad for you to end up buying.
A good strategist will listen to you and hear what’s important – to you. A strategist will typically narrow it down to a handful or so businesses on the basis of your criteria and walk you through the reasoning.
Have meetings with companies.
When you have narrowed it down to a handful of companies, that’s when you start having meetings with the actual companies. During that process, you’ll learn the more intricate details of their operations.
You typically get access to current franchisees whom you can have meetings with and ask questions. It’s where you really start narrowing it down. Suddenly, the list of 5 companies you had previously is now 3.
Study the FDD
The FDD is the franchise disclosure document, which a franchising company is obligated to provide you. It contains Item 1 through 23.
However, it’s important to know that some aspects of this document are more important than others.
I like to encourage potential franchisees to pay particular attention to item 19 which focuses on the financial performance. If you’re looking at a company where most of the franchisees go out of business after a year, is it really a route you want to pursue? Get a good understanding of what the failure rate is.
You can also take a look at Item 3 which lists pending litigation.
For instance, here’s part of Item 3 from McDonald’s FDD.
On the other hand, Item 7 lists your estimated initial investment to get going.
Here’s how the FDD is structured:
- Item 1: The Franchisor and Any Parents, Predecessors, and Affiliates
- Item 2: Business Experience
- Item 3: Litigation
- Item 4: Bankruptcy
- Item 5: Initial Fees
- Item 6: Other Fees
- Item 7: Estimated Initial Investment
- Item 8: Restrictions on Sources of Products and Services
- Item 9: Franchisee’s Obligations
- Item 10: Financing
- Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
- Item 12: Territory
- Item 13: Trademarks
- Item 14: Patents, Copyrights, and Proprietary Information
- Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
- Item 16: Restrictions on What the Franchisee May Sell
- Item 17: Renewal, Termination, Transfer, and Dispute Resolution
- Item 18: Public Figures
- Item 19: Financial Performance Representations (FPRs)
- Item 20: Outlets and Franchisee Information
- Item 21: Financial Statements
- Item 22: Contracts
- Item 23: Receipts
Think exit strategy
If you don’t see this as something you’ll want to continue doing forever, it’s important that you consider the exit strategy.
You can resell most franchises but not all. Some have very advanced structures that mean you don’t end up owning any equity. It’s
Sign the papers
Once you’ve signed the papers, that’s when the work starts. Congrats! You are now on your way to owning your own business!