5 questions to ask before buying a franchise

By Nick Hall | 05 Dec 2018 View comments

Outside of buying a house, entering into a business opportunity is one of the biggest financial decisions any person can make.

Before signing up for a franchise opportunity, you will need to engage in a comprehensive due diligence process, making sure to quiz the franchisor on operational standards and the prosperity of the business model.

In the rush of numbers and documents, you may feel overwhelmed and apprehensive to dive off the deep end, but there are answers out there that will put your mind at ease.

You just need to ask the right questions.

How long is a franchise term?

A franchise term will vary from one system to another, so it’s important to establish the length of term, relative to the investment supplied.

A franchise agreement should be long enough to enable the franchisee to recover their monetary investment and repay any loans relating to the initial purchase of the franchise.

In most cases, franchisees are granted a term of around three to five years, with the option to renew for an agreed period, however renewals will generally be accompanied by renewal fees and an obligation to refurbish the business at the request of the franchisor.

Additionally, the length of the franchise term will impact a range of other operational structures, such as lease specifications and more broadly, the lease itself.

Regardless of the length of the term, it is imperative that the prospective franchisee seeks legal advice, as a dedicated franchise lawyer will be able to provide insights into whether the agreement is viable.

What support does the franchisor offer franchisees?

One of the primary benefits of joining a franchise network over becoming an independent operator is franchisor support.

Effective franchise models should provide ongoing development and training programs to support franchisees, along with dedicated support channels or head office staff.

In many cases, these support structures will be highlighted by the franchisor as key network assets, however if the franchisor cannot provide detailed examples of support channels, programs and initiatives, a red flag must be raised.

Depending on the type of business, franchisors should be able to provide industry specific support, such as training, territory planning for mobile businesses or marketing campaign support.

Furthermore, asking the franchisor about the effectiveness of the support around the opening of the business, in particular how they could have improved that process is a great way of measuring their commitment to new entrant success.

Who is your ideal franchisee?

This has less to do with the franchisor’s goals, and more to with their expectations of an outlet’s day-to-day operations.

While you may love baking, a consultation with a bakery franchisor might reveal that a lot of the workload involves people management, stock and inventory control, and generating new business, with most baking duties delegated to staff members.

The franchisor’s ideal candidate would in this case be someone who has experience in management roles, has an interest in book-keeping and is excellent with time management, as opposed to someone who is passionate about baking.

Franchisors will generally have a list of qualifications, criteria and personality traits that fit best with the brand, and by asking them what their ideal franchise partner looks like, you can identify if your personal ethos aligns.

How are locations evaluated/selected?

Franchise systems can approach location selection in a number of ways, varying on model and industry, however it is still important to pay close attention to the business’ site selection criteria.

In the case of a mobile business, how big or small is the suggested territory? Are competitors located within the area? What is the demographic of this area? Is this the best location for my business?

Territories can be altered under some agreements, and in many cases starting off with a smaller territory allows the franchisee to achieve critical mass and return on investment faster.

If the proposed business operates from a fixed location however, the due diligence process becomes all the more important.

In some turnkey operations, the franchisor will find the location, tender the lease and fitout the site for you, however this investment is often factored into the franchisee costs.

In a case where the franchisor is the tenant and licences the premises to you, you will need to review the licence agreement, as well as view the disclosure statement where appropriate.

Similar to the mobile model, the franchisee should consider the demographics of the area and the proximity to competitors, however fixed locations are subject to an additional set of challenges.

High footfall areas will inevitably increase exposure and generate greater interest, however will also greatly increase the cost of the lease. It is important to speak with the franchisor about leasing concerns, as well as the potential to negotiate stronger lease conditions with the lessor.

What business am I comfortable operating?

There are plenty of business models that you could adopt, from mobile handyman, to fixed retail, to drive-through coffee shop, it comes down which model aligns with your goals and level of commitment.

Franchisees who are willing to serve as owner/operators are far more likely to succeed than those who operate as a silent partner, due to their increased visibility over store operations and personal investment in the business.

Structurally, it is pivotal that you understand the difference between sole traders, partnerships, trusts and combination models, as each structure presents a differing set of challenges, set-up costs and fees.

Seek advice from a franchise specific accountant and lawyer before signing an agreement.

Final thoughts

Any franchisor with an established model should be able to answer any questions you have regarding the business’ operations, structure and support processes.

Remember that franchise business opportunities are long-term commitments, so don’t feel pressured to sign without first having an extensive understanding of what the business will provide you.