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Ten Questions to Ask Before Buying a Franchise
By AllBusiness.com*

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. "Product 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. Read Top 10 Franchise Directories to learn where to start researching these opportunities.

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. That might not hold true, however, for a car wash.

3. What does the offering circular say? The Federal Trade Commission requires franchisers to provide prospective franchisees with an offering circular 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. Read Obtaining and Analyzing Franchise Financial Information for guidance in getting and understanding the UFOC.

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? A 1996 study by the International Franchise Association showed that 95 percent of franchise fees were 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? franchisors generally charge royalties equal to 3 percent to 6 percent of each franchise's revenues. Some firms charge significantly more, though, and others charge flat fees on an ongoing basis.

7. How much money will your business really make? The parent company's projections probably are optimistic. Run them by 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 new bosses. 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.

*AllBusiness.com provides resources to help small and growing businesses start, manage, finance and expand their business. The site contains Forms & Agreements, Business Guides, Business Directories, thousands of Articles, Expert Advice, and Business Blogs. Material copyrighted by AllBusiness.com.