QUESTIONS TO ASK FRANCHISE COMPANIES
The following questions are perhaps some of the most important to be asked by someone thinking of buying a franchise business:
- How much total investment will this franchise require? In your calls to existing franchisees, and your research concerning your local market, make sure to narrow down these answers.
- How much will I need in operating capital reserves until it reaches the breakeven point in terms of cash flow? Make sufficient allowance for this factor in your plans and, when in doubt, guess high. No one has ever gotten into trouble on a new business startup because he or she had put too much in financial reserves.
- How much extra cash do I need to cover living expenses while I’m starting my franchise? After becoming a franchisee, there’s a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses.
- How long will it take my new franchise to reach breakeven? This is one of the most important money-related questions you’ll need to answer. Be conservative in your estimate.
- How much of my total investment (including capital reserves) do I need to have in cash? There’s no right or wrong answer — just make sure you know what applies to you and that you easily have that amount of cash on hand.
- How much money can I make in this franchise? You will normally find the answer is related to the amount of time the business has been open. By the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
- What are the ranges in financial performance of the existing franchisees? Don’t stop your research until you are completely confident you know both the high and low end of the range.
- How financially strong is the franchise company? You obviously want to work with a franchise company that is not only strong enough to survive, but that also has the resources to reinvest in training and support of the franchisees. Make sure you review their financials and ask for help from a competent advisor if you’re not comfortable doing this yourself.