Most Important Questions to Ask a Franchisor Before You Buy
A franchise is a business arrangement in which a party, usually known as a franchisee, is allowed to access business processes, proprietary knowledge, and trademarks of an already existing business, also known as a franchisor, in exchange of an agreed initial amount of money and an annual licensing fee. In this arrangement, the franchisor is also able to operate their franchise business under the franchisor's name. This makes it easier and less risky for franchisees to become small business owners.
However, buying a franchise is not just a question of whether you have the necessary amount of money or not; you have to persuade the franchisor that you have what it takes to succeed and support their overall business strategy. Therefore, for you to qualify, you have to go through an interview. During the interview, the franchisor will seek to know how you are planning to finance the franchise, run its day-to-day operations, and build a customer base. In some cases, a potential franchisor may also ask questions about your experience in small business administration. This may seem like quite a daunting process, but the franchisor will just be doing their due diligence to be satisfied that you can be trusted to operate your franchise company under their brand.
Since you will also be making a huge financial commitment, you should also seize the opportunity to know the franchisee better and ensure that you will get value for your investment. For you to become a successful franchise owner, below are some questions that you should ask your potential franchisor before you can start thinking of the grand opening.
What is Your Company's Story?
Isn't it obvious that you have to understand the history of the company under whose brand you want to operate your small business? For you to understand the future of a franchisor, you have to understand where they are coming from. The answer to this question will enable you to determine if the franchisor has or had company-owned and operated businesses with a verifiable track record. It will also give you the opportunity to know if the franchisor is properly financed to grow according to their vision. The company's history can also enable you to learn how a franchisor makes money. If they are making more money from non-royalty sources compared to royalty sources, then you should tread with caution.
Why Should I Trust You?
In most cases, buying a franchise is a huge financial investment. For some franchisees, they may even have to quit their current jobs to work on their franchise. Therefore, you cannot afford to do business with a franchisor that you cannot trust. As such, you have to press them to explain why you should trust them and their model. They should explain what motivates and drives them. You should also learn about their beliefs and ethics. Once they have explained this, you can then start asking about their business process.
How is Your Relationship with Other Franchisors?
If you are buying a franchise from a popular brand, you will most likely become one of their many franchisees from around the country. Therefore, understanding how the franchisor relates to their existing franchisees is an important component of your decision-making process. For instance, you can ask them about their training and support system. A good franchisor should have a reproductive relationship with the franchisees. For instance, they should welcome representatives from the franchisees' community to their advisory committee or board.
You should also seek to know how much litigation the franchisor company has faced from franchisees. Too much litigation should make you think twice before signing the franchise agreement.
What Am I Expected To Pay Upfront?
Like with any other financial investment, this is probably the most important question that you will be having in your mind as you approach a franchisor. You want to know how much money you will have to pay to get the franchise. On average, the franchise fee is about 35,000 dollars, but depending on the franchisor that you are dealing with and their concept, it can range from $0 to $100,000 or even more. You may also be required to pay for support, training, future royalties, franchise transfer, liquidation, equipment, and even software. You can also ask if there are any franchisor offers. The details for what you are supposed to pay will be provided in the FDD, but the franchisor should be in a position to explain them to you.
The Takeaway
Overall, it is apparent that buying a franchise can be quite a great investment. However, it involves significant financial and emotional commitments. As such, you have to do your due diligence to ensure that you are investing wisely. In other words, you have to take advantage of your interview with your potential franchisor to ask all the necessary questions that can enable you to assess their reliability. If you have any doubts you should do further research and only sign the franchise agreement once you are satisfied with their franchise system.