Certainly, there are many advantages to purchasing a franchise, like national or regional brand recognition, or the provided blueprint for proven processes and procedures. However, there are extra fees and hoops to jump through with owning a franchise that a potential buyer should be fully aware of before they sign on the dotted line. Since we primarily sell existing franchised businesses and not brand-new franchise opportunities, the following questions make that assumption.
Here we outline 10 questions that buyers should probably ask before they make their decision to write an offer for a particular franchise. Of course, this is not intended to be a complete list, and by no means should a buyer interpret this informative article to be legal or due diligence advise, it is just a collection of questions that, based on our experience selling franchises, buyers really should have the answers to before proceeding with the purchase.
When evaluating a potential franchise business purchase, here are some great questions to ask:
1. Why are you motivated to buy this particular franchise?
This is a great opening question to ask yourself to make sure that you are moving in the right direction. What is it about this franchise/business that makes sense to you, that gets you excited about owning it, that makes you want to buy it? It will help you sort through your true feelings and analyze your reasons to pull the trigger (or not) with this franchise model.
2. How long has the franchise been in business?
This is an important question to find the answer to because it gives you an idea of the longevity of the company, it’s “staying power,” and its overall success as a franchise brand. Did they just start franchising last year or have they been doing it successfully for the past 10 or 20 years? If it’s a new franchise concept and the current owner who started the franchise location is trying to sell it already, find out why. Is it not working? Is the marketplace too flooded? Or do they have a legitimate reason for selling at this early stage in the life of the business?
3. What is the approval process/approval qualifications for buyers?
This is a particularly important question for buyers to know in advance because we have seen in the past where a buyer gets the business under contract, goes through due diligence, then begins the franchise approval process, only to find out (after all of the work they’ve done already) that the franchise will not approve them as a franchisee. The deal is unfortunately dead at that time and the seller must find a brand-new buyer, and the buyer has to go find another business and repeat the process. Every franchisor has a different approval process, and more importantly different approval guidelines for their owners.
Potential buyers are in a better position to find out whether or not they meet those guidelines before getting too far down the line in the purchase process of a particular business. For example, some franchisors, like Subway, won’t allow a US E2 Visa-holder to purchase a Subway franchise. The buyer is legally allowed to own a business, live, and work in the US, yet the franchisor won’t approve them as a viable owner of one of their franchise locations. That’s a big bummer, because USCIS loves E2 Visa applicants who are buying a franchise, because it’s a proven business concept. Before you spend too much time or money on a particular franchise business purchase, make sure that you are aware of any franchisor requirements for buyers or things in a buyer’s profile that this particular franchise won’t accept.
4. How much is the franchise transfer fee?
The original franchisee will have paid a hefty sum, commonly known as the franchise fee. In many cases this investment ranges from $25,000-$200,000 so it is quite a perk that the original owner has already paid this fee to the franchisor. In addition, whenever there is a sale of an existing franchise location, there will most always be a franchise transfer fee that needs to be paid to the franchisor. This is usually thousands of dollars and the amount varies widely depending on the franchisor. Make sure you verify how much that transfer fee is.
5. Who is going to be paying the franchise transfer fee?
Sometimes the current owner will be required to pay for it, sometimes the new buyer will have to pay for it, and many times it doesn’t matter which party pays for it and the buyer and seller split it as part of their closing costs. Before making an offer to purchase a franchise, you need to know exactly how much this franchise transfer fee is and who will be responsible for paying for it. If the seller is paying, great, and if it is negotiable, then you need to ask your business broker to work that into your offer to purchase.
6. How much funding do you need?
You need to look at the numbers and make sure you have enough to make the deal happen, and then give yourself some padding for the first few months in operation. Are you going to be paying the franchise transfer fee? How much will the entire purchase of the business be? How much will you need to have in working capital? Are there any other immediate expenses that will need to be paid, such as franchisor required renovations or updates to the location? Don’t forget about deposits for rent, utilities, licensing, software, and any immediate inventory that needs to be ordered. You have to think outside the box for this one and really plan ahead. Do you realistically have enough money for all of this, as well as money to live off of while you wait for invoices to be paid and revenue to come in from the business. When you buy an existing business you do “start making money on day one,” but sometimes there is a lag in getting paid on services rendered on day one, depending on the industry and business type you are purchasing. Just be aware of that as well, because you will need to account for that.
7. What are the ongoing franchise costs?
You need to know how much the franchise charges in monthly royalties. Usually it’s a percentage of sales revenue. They also often have an additional monthly percentage that they charge for marketing too, so make sure to ask about that. Then look at the contract you will be signing with the franchisor (you will be provided with a Franchise Disclosure Statement for 14 days, so you have plenty of time to review it and sign off on it), does it have specific requirements for required renovations, periodic re-branding, etc. Those on-going requirements will cost money, and you need to know that you will be making enough to cover those expenses. Comb through the agreement to see if there is anything else you will be required to do that might necessitate you spending more money.
8. Are other existing franchise owners making money?
You will know by looking at the financials of this business if this owner is currently making money. If they are, then great, it’s a pretty good sign that you could reasonably expect it to continue if you operate the business similarly. If this franchise location is not currently making money, then you need to (confidentially) try to find and speak with other franchisees to see how they are doing to determine if it’s an issue with the franchise model or if it is just this particular location or even this specific owner. If you see potential in the business and other franchisees have found success, then it might be worth taking the risk. If many existing businesses of this franchisor are all seeking to sell in multiple locations, it might be a red flag that something is not right. You will need to investigate further to determine if you want to move forward with the opportunity.
9. Is the franchise on the SBA approved lending list?
This question is really important to buyers who will be using an SBA loan to purchase the business. If the franchise is not on the SBA list of approved franchises, then unfortunately SBA lending won’t be an option. The franchisor is the only one who can make the applications to the SBA and go through the approval process, and from what we are told, it’s not a quick process. So, if you are a buyer that is relying on an SBA loan to acquire a business, just quickly do a google search to make sure that the franchise is on the list.
10. What level of support do franchisees receive from the franchisor?
This question is particularly important to buyers who maybe haven’t ever owned a business before, and you are looking for lots of guidance, help, and support. Afterall, that is a big reason to buy a franchise, because they offer a certain level of support to their franchisees. They hopefully want to help all of their franchise locations to be successful, so it is in their best interest to do as much as they can to help you get there. Ask about what support or training they provide, and find out about on-going assistance as well.