Merchant Capital

3 Tough Questions You Need To Ask When Making A Smart Franchise Purchase

Franchising is an incredibly powerful entrepreneurial model, but it is far from foolproof. While you may feel yourself getting really excited about the prospect of buying a franchise and making your entrepreneurial dreams come true, it’s really important that you maintain some emotional distance when evaluating your franchise options. This begins with having a clear understanding of the hard questions you need to ask and knowing which red flags to look out for. So what are the three really tough questions you need to ask when making a smart franchise purchase? We’ve done the homework for your so you know exactly how to pressure-test your thinking and evaluate if this franchise purchase is the right decision for you.

1.     How does the franchisor react to my tough questions?

It can feel pretty exhilarating when you find a community of entrepreneurs who share your passion and want to make your business dreams come true. Often this fills you with optimism which can cloud your judgement. At times like these, it’s important to ask some hard questions and then carefully observe how the franchisor answers your tough questions, and whether you receive straightforward answers. A good technique to understand if there are issues with the franchise model itself is to ask about the bottom of the unit performance bell curve. Ask how the franchisor approaches under-performers and if breakdowns in the system are they the exception or the norm? It is important also to find evidence of healthy franchisee-franchisor relationships where there is open dialogue and clear communication channels. The next thing you need to assess is how passionate management is about improving the profitability of their franchisees and how they support their network in growing sustainably. Ensure you have a solid understanding of this, find evidence to support what they are telling you and try to speak to as many franchisees as possible in order to cross-reference the feedback.

2.     Does the franchisee place more emphasis on selling units or opening units?

The speed of new franchise unit sales is often sold as a highlight to potential franchisees. But it is far more important that a franchise is profitable than simply open. In this way, emphasis should always be placed on profitability over units sold. A strong franchise model will have lots of ways to ensure that once a franchise is opened, it will have the best chance of success. This will take the form of supporting the new franchise in starting out with on-site training and other support processes. Weak franchise concepts often get stuck in the start-up without a strong opening strategy to fall back on. So make sure you ask a lot of questions about the franchiser’s new site track record and the support team they have in place. Interview as many recent franchisees as possible and understand what support they received, if there were any surprises and if cost estimates were accurate. Ask them what they wished they had known before they began and if they would have done anything differently had they had the chance. 

3.     What are the core motives of their influencers?

Strong and sustainable franchise systems have a huge field of influencers who recommend them. Make sure you understand if anyone recommending the franchise is being paid and if so, how. Do they really understand the model first hand and have they received training? Always bear in mind that the best recommendations come from first-hand franchisees. But even this audience needs to be approached with a healthy amount of scepticism. Often there are incentives for referrals and the feedback you are getting may be loaded. Therefore it’s in your best interest to speak to a wide range of owners; feel them out, trust your gut and don’t be afraid to ask uncomfortable questions.

The bottom line

At the end of the day, making a franchise purchase is a huge commitment. While it comes with a lot of perks you are ultimately going to join an existing system with a set way of doing things. Therefore it is your responsibility to ensure you have a really good feel for that system and that you can see yourself operating a strong business within that network. These key questions will hold you on solid ground and put you in a stronger position to evaluate your next steps in your entrepreneurial journey.  

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