What To Consider When Buying A Franchise

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Buying a franchise is an excellent opportunity for someone to chase their entrepreneurial dreams without starting from scratch. Rather than formulating a plan and building brand awareness over the years, you already have structure and can channel your focus to operations.

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Before signing to purchase a franchise, there are lots of things you should consider. Here are some of the most important considerations.

Market Demand

Whether you start a business from scratch or opt to purchase a franchise, the first step remains the same: determining whether or not people want what you’re offering. Something that does exceptionally well in one country may not do well in another. If you’re too close to a similar franchise, there may not be enough market share to make your business profitable.

Conduct some primary and secondary research before purchasing your franchise. If there are already four other pizza shops in a 15-mile radius, perhaps adding another isn’t in your best interest. However, if sushi lovers in your area have to travel out of their way to get the maki they crave, you have an opportunity.

Cost and Investment

Starting a business comes with cost implications. Before you agree to purchase a franchise, you need to take a look at the financials. What are you expected to pay upfront? What do you get in return for your investment? With the data and projected sales in mind, how long will it take for you to be profitable?

When you start a franchise, there are often different costs that you wouldn’t expect when starting a business from scratch. You may be expected to undergo special training that is mandatory for franchise ownership, which can cost tens of thousands of dollars.

Rules and Guidelines

While the built-in brand awareness that comes with a franchise is of significant value, it also comes with rules and regulations that startups do not. You may be expected to adhere to certain protocols to maintain your franchise agreement and be able to put their logo on your door.

The depth of these rules depends on the franchise you plan on operating. They can be as simple as requiring uniforms and running specific promotions or as detailed as specifying an exact floor plan for your organization. The rules can often put a damper on your creative, entrepreneurial spirit, so read the fine print.

Other Franchisees

Get an expert opinion by asking other franchisees about their experience with the franchise, asking them to highlight their positive points and challenges. This is an easy way to get an inside look at franchise ownership before agreeing to purchase anything. Consider this exercise a form of checking references after an interview to ensure that everything is as it seems.

Be sure to ask a few different franchisees to ensure that your feedback isn’t skewed by overtly negative people or those who view you as competition.

Company History

Look at the company’s history of success before making a decision. If they have few problems, their stocks are stable or on the rise, and the franchise name has been steadily trending upward, you’re probably safe to move forward. Find out information on how many franchises have open and closed in the past five to ten years. Has there been any controversy in the news attached to the franchise name?

One of the benefits of a franchise is the support network you have with other franchisees. On the other hand, if a fellow franchise does something newsworthy and controversial, your business may also suffer.

Should You Buy?

If you’ve done your due diligence with the considerations listed above, and everything seems to be in order, then move forward with your franchise goals. If, however, some of these considerations highlighted some red flags, take a step back and reevaluate. Perhaps this specific franchise is not for you, and your focus is better targeted elsewhere.

About the Author

Ankur Shah
Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at AnkurShah47@gmail.com