Ten Questions to Ask Before Buying a Franchise

When you buy a franchise, you're putting big dollars on the line — and your success doesn't entirely depend upon you. The quality of the company that stands behind your franchise also matters a great deal. Thus, it's important to find out as much as you can about the parent company before you lay your money down. Here are 10 questions to ask:

1.  What type of franchise is it?   Most franchises are "package franchises" — businesses such as fast-food

restaurants, muffler shops, or motels that come complete with a business model laid out by the parent company. That model covers everything from financial controls to hiring guidelines. "Business-format franchises" include businesses such as car dealerships and gas stations that exist mainly to distribute the parent company's goods. Owners of product franchises have more control over the way they run their businesses.

2.  Does the business lend itself to the franchise model?   Fast-food businesses, for example, greatly benefit from their association with the brand name and products of the franchisor.

3.  What does the disclosure document say?   The Federal Trade Commission requires franchisers to provide prospective franchisees with a Franchise Disclosure Document (FDD) that contains basic facts about the company. Read this document; it will contain information about the firm's business experience, legal history, and — perhaps most useful — its other franchises.

4.  How many franchises does the organization have?   A large number of franchises indicates a successful, established business. Be careful, though, if a firm's other franchises are located near yours, you could wind up competing with a nearly identical business.

5.  How much is the franchise fee?   The franchise fee is the upfront money you pay a franchisor for the right to license the business. Most franchise fees are less than $40,000. But you might pay much more for a franchise affiliated with a blue-chip national chain.

6.  How much will you have to pay in royalties?   Most franchisors charge their franchisees an ongoing royalty fee that’s calculated as a percentage of gross sales. While most royalties are in the range of 3 percent to 6 percent, some firms charge flat fees on an ongoing basis.

7.  How much money will your business really make?   Many franchisors don’t give you projections, so talk to an accountant who can assess the business’s potential. Also talk to other franchisees; the offering circular will tell you how to contact them.

8.  Can you work with these people?   When you buy a franchise, you're in for the long, expensive haul, so you'd better be able to work with your franchisor. Make sure to visit the company's home office, even if it's in a different state. And ask other franchisees about their experiences with the parent company.

9.  How will the franchisor help you?   A franchisor may help you select a site for your business, negotiate a lease, advertise for and interview prospective employees, get business licenses, finance the franchise fee or equipment costs, or provide other services. Ask what the franchisor will do for you — and get it in writing.

10.  Is the franchise company legitimate?   Some franchisors try to bilk new entrepreneurs. Check with other franchisees, the Federal Trade Commission, and the Better Business Bureau to determine the legitimacy of the franchise. Also, if you’re located in a state that requires franchise registration (CA, HI, IL, IN, MI, MN, ND, NY, RI, SD, VA, WA and WI), confirm that the franchise company is registered with the appropriate state office.