Buying a franchise can be an exciting prospect. Not only do you have many choices, you can leverage the advantages of franchising to help you build your business. These advantages include a preexisting business model, name recognition and ongoing managerial support from your franchise. However, you'll need to watch for clauses in the franchise agreement that may not be designed for your best interests. Get several trusted opinions on the purchase before you sign on the dotted line.
Scope Out Franchises
Determine what kind of franchise you want to buy. As the Small Business Administration notes, there are "business format franchises" and "product franchises." The first refers to an all-inclusive business model with ongoing operational support from the franchisor, whereas the latter sells a trademark licensing right to a franchisee. Seek guidance from a franchise coach or business broker if you require help narrowing down your options.
Do not overlook existing franchises, as opposed to buying new. Buying extant franchises saves you money on inventory, equipment and signage, as well as time spent on hiring and developing a customer base.
Perform Due Diligence
During the "getting to know you" stage, obtain offering documents from the franchises of interest describing the companies' and owners' histories, fee structures, financial statements and the franchise relationship. Ascertain whether the franchise is legitimate through the Federal Trade Commission and Better Business Bureau. Ask the franchisor to provide a list of existing franchisees, and contact those owners for more details on their experiences with the franchisor and what their training was like. Visit their operations, if possible. In addition, speaking to former owners who terminated their franchises can help alert you to potential pitfalls of a particular franchise.
Examine the Paperwork
The Franchise Disclosure Document is the key document to review when buying a franchise. Examine the document for provisions such as the franchise fee, which is the money you pay to license the business. Check for the royalty fees, which are paid to the company for continued use of the franchise's resources. Franchises vary widely in fee structures, so compare the range of prices within your industry. You may want to confer with an accountant or an attorney to navigate these stipulations, given that FDDs are written to protect franchisors rather than franchisees.
Sign the Agreement
Before signing the franchise agreement, take your time and don't be bullied into signing without protecting your rights. You can always walk away from an unreasonable agreement and forgo purchasing. Watch for particular clauses in the agreement, such as merger and acquisition rights that could be used to compete within your territory. Also, specify that future modifications to the agreement cannot increase your financial obligations. Avoid covenants and provisions that impose burdensome restrictions. Speak with at least three different businesspersons about your prospective purchase and get their feedback -- listen to objective opinions about your investment before signing.
Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.