Franchise Caught Your Eye? Better Check the Financials
Candice Lee was quoted in a May 5th article on Daily Finance about the financial risks associated with entering into a franchising agreement.
If you’re going to consider buying into one, whether a fast-food restaurant, hair salon, moving company, or fruit arrangement franchise, Lee advises that you need to go through the potential numbers with a fine-tooth comb.
"One of the first things [potential franchise owners] should look at is what is their experience in this particular industry," said Lee, the head of Palmieri Tyler’s Franchising Group. " The more you understand the particular type of business from having been in something similar, the better a chance you have of succeeding."
Some brands, including the one you choose, could fall to the wayside. In restaurants alone, such concepts as better burgers, bagels and rotisserie chicken have come and gone with many of the brands virtually disappearing. Lee says you need to have enough money coming in not just to create a sustainable business, but to justify your initial investment.
"Consider having an accountant to help with projections on how many customers they would need to bring in to make this a worthwhile business after they shave off the royalty fee, the initial franchise fee and all the other costs of being part of a franchise system," Lee said.
Another important research step is to talk to other franchisees, both current and past owners. The FDD requires a list of literally all current franchisees and those that got out of the business within the last year. Ask about such topics as the support system of the franchisor, how profitable they find their franchises to be, whether there are problems with the business model and if the prices of goods and supplies sold by the franchisor seem to be gouging.