Key questions to ask when buying a franchise

Morne Cronje

Franchising continues to be an attractive investment for entrepreneurs that want to play it safe and go with a tried and tested concept. In spite of that, even a proven business model still carries an element of risk for entrepreneurs that go in blindly without doing proper due diligence.

Morne Cronje, Head of Franchising at FNB Business says, similar to other businesses, franchises are also sensitive to economic headwinds. As a result, entrepreneurs that want to take that big leap of faith into running their own franchises should carefully do their homework to avoid disappointment and financial losses.

He shares ten essential questions that entrepreneurs should ask franchisors before signing on the dotted line:

• When will I reach break-even point - It is important to understand all the start-up and running costs of a franchise. This helps to determine when the business will begin generating enough revenue to cover all monthly expenses.
• Will I get enough support - Getting adequate training and ongoing support is essential for the success of a franchise business.
• Is the business subject to seasonal trends – This information can determine whether the entrepreneur is up for the challenge, and whether it would be realistic to generate cash flow during off-peak seasons.
• Are there any hidden costs – New franchise owners cannot afford to deal with any surprises when the business starts operating.   
• Have any franchises failed in the past year – Case studies can help entrepreneurs to weigh their options and better prepare for setbacks. Closures need to be disclosed by the franchisor.
• Can I interview current franchise owners – Interview at least five franchisees to determine whether they are still satisfied.
• What challanges is the business facing – Ask about current challanges and if there are plans in place to overcome them. Also, find out about competitors and how the business performs in comparison.
• How much time will I have to commit – Running a franchise requires total commitment from the owner. It is essential to know the operating hours and time you will have to commit as the business owner. Franchising remains an active investment.
• Can I terminate the contract – Reading and understanding the fine print is important when entering into a franchise agreement. Moreover, entrepreneurs should know about the costs involved when terminating the agreement. 
• What are the business’ long-term goals – Find out about the growth prospects of the business and if they are aligned to your own objectives.  

“When these questions have been answered, the entrepreneur will be able to determine whether the respective franchise is the right fit. Buying a franchise is a long-term commitment that should be carefully considered to avoid any pitfalls,” concludes Cronje.