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There are many reasons why entrepreneurs want to buy a franchise. Making a brand successful is a huge amount of work in today’s world. Competition for consumer dollars is fierce. It can be challenging to take a brand to the next level and make a profit. This profit comes from a well-thought-out and strategic business plan.
The great thing about buying a franchise is that the brand is already proven. Also, franchisees can benefit from the franchisor’s help in navigating the challenges of the business. As for specific profits, each franchisor must disclose sales and estimated earnings in its franchisor disclosure document, often referred to as an FDD.
Before buying a franchise, here are eight essential questions to ask.
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Does the franchisor have a dedicated internal real estate department?
If a franchisor has paid corporate staff whose sole purpose is to help their franchisees through the real estate process, then the franchisor gets a star in my book. The franchisee will typically be represented by a real estate agent when selecting a site and negotiating the deal. However, the in-house property manager is essential to assist the franchisee’s broker. The in-house property manager will provide the franchisee’s broker with detailed location criteria aligned with the brand requirements of the franchise.
How do the real estate department and support staff relate to the franchise sales department?
Of course, franchisors need a sales department to sell franchises and grow their brand. Still, it’s a good idea for a potential franchisee to know the size of the franchisor’s sales force. It can be a red flag if a company has an extensive sales force and few support staff for the franchisees.
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Does the franchisor have a real estate approval process?
The majority of franchisors will have to approve a franchisee’s location. The approval process should always take place before a franchisee signs a lease. If the franchisor has no method of approving the site where the franchisee’s business will be, the franchisee should be concerned. The lack of an approval process may mean that the franchisor is in a hurry to open locations and does not have the quality of the sites as a top priority.
Does the franchisor have a letter of intent?
The letter of intent is the framework for the rental agreement. Most of the key deal points for the lease are in the letter of intent. Think of basic rent, additional costs, rent increases, rental duration, options, improvement allowance tenant, delivery landlord, free rent and the rental start date. In addition, the letter of intent includes the tenant’s use clause and the franchisor’s advice on necessary exclusives. The lessee must inform the lessor of the use for which he will be renting the space, and the franchisor must provide this usage language. The franchisor must also state exactly what it wants in relation to an exclusive contract. Exclusive protects the tenant from being rented by a landlord to a competing tenant of the same use.
Does the franchisor have a letter of employment for the landlord?
The letter of employment from the landlord contains the conditions for the delivery of the property. Details of utilities (electricity, water, and gas), heating, ventilation, and air conditioning (HVAC), number of toilets, floors, and ceiling are just some of the items covered in the landlord’s letter of employment. If the franchisor provides its franchisee with a letter of employment from a landlord, this will demonstrate experience.
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Can the franchisor provide a map showing the franchisee’s territory?
When buying a franchise area, the franchisee will want to know where to open their business. If the franchisor doesn’t have a map showing this exact area, I recommend asking for one.
In addition, ask the franchisor how many other franchisees have purchased areas in the area. It would help if the franchisee also asked the franchisor what protections are provided to prevent another franchisee from opening next to its territory. Finally, ask specifically how close another franchisee can open to an existing store. Sometimes I see franchises growing too fast, which can hurt profitability.
Once a franchise agreement is signed, how long does the franchisee have to find a location?
There are two viewpoints to this question. The franchisor wants people to refrain from buying up areas and not opening stores. The franchisee only wants to open a store if the desired real estate is available in its territory. The franchisee needs to understand if there are consequences and what those consequences are if he buys a region and does not open the store(s) he agreed to in his franchise agreement.
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Can a franchisee trade after purchasing a territory?
This depends on the number of franchisees the franchisor has. Usually I see franchisors working with their franchisees if the franchise wants to trade territories. For example, the franchisee may want to change area due to a lack of quality real estate, or they may need to move. It is advantageous for a franchisee to inquire about the possibility of changing territory before signing a franchise agreement.
Buying a franchise is a decision that requires a lot of thought. I also recommend that potential franchisees talk to many existing and ex-franchise owners of the brand in question. The more questions asked up front, the better equipped you are to run a successful business.
