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Questions to Ask Before Investing in Franchise Companies
Posted on November 12, 2010 by My Franchise Law

So you’re thinking about purchasing a franchise, but don’t know how to get started. Here are several questions to ask when evaluating potential investments.

  1. What does the FDD state? The first thing to do when evaluating potential franchises is to hire a franchise lawyer to evaluate the Franchise Disclosure Document. The FDD contains important information on how the business is run, its legal history, and what the expectations will be for you as a franchisee.  Your lawyer will be able to point out any problematic areas in the document, and help you evaluate whether it looks like a promising investment or not. 
  2. How many other franchisees are there? You will want to find out how many other franchisees are already established, and whether any of them will be located near your new business.  Although this can be an indicator of how successful the organization is, you will also want to know the failure rate for new franchisees.
  3. How much will it cost? Determining the initial costs and ongoing royalties is another important factor to consider, and a good way to narrow down your list of potential choices. You will not want to invest in a company that will absorb all of your capital, because you will have many other expenses associated with start-up.
  4. How much revenue can you expect? When you are considering the revenue and expenses generated by the franchise, you will want the assistance of a qualified accountant to get an accurate estimate of how much you can actually expect in ongoing revenue and expenses.  Also, try to talk to other franchisees to get a clearer financial picture of what you may be getting into.
  5. How much support will you receive? Franchisors can offer varying levels of support to new franchise owners, so it’s important to determine how much assistance they can offer you as you are starting your franchise.  Will they help you negotiate your lease, advertise, train employees, and get your business license? Find out how much they are willing to offer, and be sure to get everything in writing before you sign any binding contracts.

External Resources

Small Business Administration

A government resource for finding information on planning, mentoring, and strategies for franchises and small businesses.
SBA Small Business Planner Business Gateway

Resources for every step in planning your business or non-profit, from getting your EIN to handling wages. Business Gateway

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