Today, one out of every 12 companies has a franchise business model for entrepreneurs to invest in. Franchising has been growing steadily for years, thanks in part to more opportunities and an increasingly attractive path to business ownership.
With training, systems, and support already baked into the franchise package, it’s easy to see why new business owners are turning to franchisors rather than going it alone. Still, despite the success among franchisees, the process of actually buying a franchise isn’t something most first-time buyers are familiar with.
To help buyers through this, The Federal Trade Commission (FTC) has an excellent guide to buying a franchise you can find here. As a supplement, we’ve created our own step-by-step guide here. We suggest checking both of these resources out first and then using the checklist below to make sure you’re covering the important points throughout the process.
Get real-life advice for buying a franchise from those who’ve done it themselves. Grab our free guide: What it’s Like to be a Groutsmith: a Q&A with 8 franchise owners.
1. Investment Capital Requirements for New Franchisees
☑️ Franchise Fees
Every franchisor requires potential owners to prove they have sufficient financial resources to pay for the fees involved upfront. The initial franchise fee is often the most important of these expenses to consider first. Have you thoroughly evaluated your finances to ensure the opportunities you’re considering are viable?
☑️ Start-Up Expenses
Start-up expenses include lease costs, construction or renovation costs, equipment costs, purchase of inventory, and the ability to cover all other costs for a minimum of six months. As with most new businesses, it often takes a few months (or even longer) to see a return on your investment as profit. Do you have at least a six-month plan for covering expenses during the start-up phase?
Sometimes construction and equipment costs need financing with loans if you can’t cover the expenses yourself. If you’re looking to keep expenses like these to a minimum, a home-based franchise opportunity might be worth looking into since they carry no construction or rent expenses at all. Have you considered a home-based franchise opportunity to reduce expenses?
☑️ Other Investors
People sometimes invest in a franchise as a group. In this case, ownership and management responsibilities for each investor must be clearly defined by the written agreement. Have you considered partnering with others to invest in a franchise opportunity?
☑️ Ability to Withstand a Loss
No matter how wonderful an opportunity may seem; there is always the risk of loss, which must be taken into consideration too. Have you taken a close look at your finances to determine how you could continue operating the business in case losses occur while it’s getting off the ground?
2. Business Owner’s Skill Set
Some businesses require certain levels of specialized education and training. Consider what’s relevant in the context of the specific type of business and make sure you have the requisite education.
While some franchises require their owners to have some level of prior experience, others actively look for newcomers to the industry. Here at The Groutsmith, for example, almost none of our franchisees had prior experience in grout and tile. Our training program is designed specifically to give those without experience the tools, instruction, and practice they need to become experts in the field. Is prior experience needed for the opportunities you’re considering? If not, do they have a comprehensive training program in place to ensure you’re trained before opening your franchise?
Most franchise businesses are “people businesses.” The owner needs to have good customer relations skills, communication skills, and the ability to motivate workers if they decide to work with a team. Are you prepared to interact with customers regularly?
The franchise company provides initial training. Then, the franchise operator needs to be able to train others that become new workers. Is training laid out to ensure everyone has what they need to become an expert in what they do?
Ongoing support from the franchise company is necessary to make sure the business stays fresh and responsive to current markets trends.
☑️ Brand Recognition
When customers already know a brand, they know what to expect and come back for service again and again. Whether they’re already familiar with a product or remember hearing good things from friends or family, look for franchises that have a strong identity among customers. Does the company have positive brand recognition or will you have to fight an uphill battle against a stale reputation?
To achieve the brand recognition mentioned above, your franchisor should have some level of local or national advertising. Ask potential franchisors how they reach out to customers during the research process. Are specific marketing and advertising activities supported by the franchisor? If so, do other franchisees feel they are effective?
Demand for the company’s products is sometimes affected by changes in general market conditions that franchise operators may not control.
Entrepreneur tells about three franchise operators who succeeded in spite of difficulties and an economic downturn. How each individual franchise operator does, depends on their choices, hard work, and perseverance. Is there a demand for the product or service in your area?
4. Franchise Due Diligence
☑️ Finding the Right Franchise
There are plenty of excellent franchise opportunities, but without proper franchise due diligence, you may miss key details that make a big difference. Have you done or are prepared to do all the due diligence needed to make a smart decision?
☑️ Checking the Franchisor’s Background
Use a good accountant, a qualified business attorney, and professional business advisers to make a detailed check for background problems of the franchise company.
Talk to existing and previous owners of a franchise that is of interest. Click or tap here for a list of questions to ask if you don’t know where to start.
5. Financial Goals
☑️ Income Goals
The potential earnings from operating a franchise need to match your lifestyle goals. Have you reviewed the earnings information provided in the Franchise Disclosure Document before taking the next step?
☑️ Franchise Renewals
Most franchise agreements are for a limited period of time and some do not renew automatically. Have you considered the renewal terms carefully and compared them to your long term business goals while researching the best opportunity?
☑️ Geographic Expansion
In order to have upside potential, there needs to be the possibility of expanding to addition franchise units in suitable geographical areas. Have you talked with potential franchisors about expansion if you intend on growing your business beyond a single location?
Other helpful articles:
- How to Open a Franchise With Little Money
- 7 Questions to Ask Before Buying a Franchise with Your Spouse
- How to Turn a Low-Cost Franchise into a Highly Profitable Business
- 5 Money Questions to Ask Before Buying a Franchise
- 5 Things to do After You’ve Found the Right Franchise
Read a real-life Groutsmith franchise success story:
- Meet Mike Ketzner, Groutsmith owner in Orlando, Florida
- Read What it’s Like to be a Groutsmith: a Q&A with 8 franchise owners
Learn more and connect with us and get the conversation started:
Interested in a low-cost franchise opportunity you can grow by creating a community of dedicated customers? Click here to learn how The Groutsmith has become a pioneer in grout and tile cleaning, repair and restoration. Want to start a conversation about owning a franchise of your own? We’d love to talk. Click here to contact our team and learn more.
Looking to learn what it’s like to own a Groutsmith franchise? Get a first-hand look from eight franchisees in our free Q&A guide. Click below to download.