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Essential 5-point Guide to Buying a Franchise

5 Things to Investigate Prior to Buying a Franchise

Investing in a franchise business is often one of the most important financial decisions that a person will make. Of course, the investment should be based on sound research. This research should be designed to yield clear and accurate answers to well-framed questions. To increase your chances of making the best business decision possible, you will need to frame your questions in a well thought-out research plan. Although your research plan will likely encompass many issues, we have outlined five points you may will to include in your research plan. Each of these points should be examined by employing SWOT Analysis: by identifying and evaluating the Strengths, Weaknesses, Opportunities and Threats.

Note that some of the information that can help you assess these points can be obtained by disclosure documents required under certain provincial legislation [Alberta, Ontario] or in the Uniform Franchise Offering Circular ["UFOC"] if the franchise system operates in the United States. So be certain to ask for these documents if they are available

1. The Franchise System's Products or Services: Evaluating Competitive Dynamics

Examine the 4P's of Marketing for that franchise system's products and services in light of ongoing demographic changes, economic cycles, continuing technological advancement and existing and potential competition. Examine whether the franchise brand has long term value that is sustainable and/or is being enhanced. And finally, examine why the product or service is better sold by a franchise in general, and that franchise in particular, rather that by a non-franchised business.

  • Product/Service: What is being sold to the end user and how does the end user feel about the quality of that product or service? Is the product or service unique or differentiated in the market place and is it protected by copyrights or patents?
  • Price: is the product/service well priced to value and with respect to the competition?
  • Place: Are the products/services sold via the most effective locations or types of sites?
  • Promotion: Is the product monitored effectively and well understood by consumers?

2. The Franchisor: Identifying Stronger Franchisors

  • Character: What is the reputation of the franchisor? Are they a member in good standing of relevant industry trade associations-eg. The Canadian Franchise Association?
  • Track Record and Quality of Relationships: Find out how existing franchisees are doing and how they feel about their franchise system. Find out if any franchisees have left the system, what prompted them to leave and whether their terms of departure were mutually satisfactory.
  • Financial Strength: How strong is the franchisor financially? Are you able to view financial information about the franchisor? Is this information audited or externally prepared?
  • Management: How strong is management with respect to tenure, expertise, and experience? Do head office and field management have a proven ability to deliver?
  • Disclosure: Does the franchisor provide current discloser documents that fully comply with existing legislation?

3. The Franchise System: Key Success Factors That Differentiate Strong Franchise Systems

  • Site Selection Rigour: Does the franchise system have a method of picking sites and how successfully have these sites performed?
  • Franchise Selection Rigour: Does the franchise system have a method of choosing its franchisees and have those franchisees stayed with the system or is there an unusually high churning of its franchisees? Have the franchisees achieved acceptable returns on their investment and are they happy with their investment?
  • Controls and Monitoring Rigour: Does the franchise system have the necessary financial and management controls to identify early warning signals in its business as a whole as well as in the individual operations of its franchisees? Does it work effectively and efficiently with franchisees to work through problems or challenges?
  • Track Record: Has the franchise system been successful to date? Have franchisees done well? What has the failure rate been and what is the failure rate in related franchises and non-franchised businesses? What is the relationship like with the key service providers such as suppliers, banks etc.

4. Financial Commitments: Evaluating Your Total Investment

  • What is the total cost and breakdown of your investment? How much incoming equity is required?
  • What are the ongoing financial commitments required - including fees and royalties, refurbishment schedules/amounts, minimum purchase quotas etc.?
  • What is the breakeven point for the business and how long will it take to reach breakeven? What is he profitability potential of the business?
  • What does the 5-year business plan look like and are the franchisor's projection for that site achievable? Have the franchisor's projections on other sites been achieved?
  • Find out whether the franchise system has a financial services package for franchisees with any of the Canadian chartered banks.

5. The Franchise Agreement: This Should Be Reviewed with an Independent Lawyer Who Specializes in Franchising

  • Does the agreement protect both you and the franchisor? Are the rights and obligations of both parties clearly stated?
  • Does the agreement cover in detail all the franchisor's verbal commitments?
  • What are the renewal terms? Are there provisions for arbitration? Does it cover terminations?
  • Does it cover sales territories and exclusivity?
  • Does it cover the purchase of materials from the franchisor directly as well as outside parties?
  • Are details regarding start-up, training and ongoing assistance adequately spelled out?
  • Is the franchise or business you're buying/leasing clear of all liabilities? Ensure it has no outstanding balances on its account with 3rd party organizations like the provincial workers' compensation board/commission. Contact the board/commission and inquire about a purchase certificate certifying no liabilities.
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10/02/2009 19:35:03