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How to Buy a Franchise: Evaluating a Franchise Purchase

If you’ve narrowed down your focus and found a franchise opportunity you would like to purchase, it’s now up to you to do your homework to see if the particular franchise investment is a good fit.

The first, and easiest, way to gather some key information is to get a copy of the Franchise Disclosure Document and study it thoroughly with your franchise lawyer for any red flags or inconsistencies.

One of the first key things you should look at within the disclosure document is your franchisor’s business background and what experience they have in managing a franchise system, as well as how long they have been with the current company. You do not want to invest your hard earned cash in a franchise that could go belly-up because of managerial problems beyond your control.

This document will also reveal whether your franchisor or any executives have ever been involved with a bankruptcy, and how recent this was. This is important to understand the financial stability (or instability) of the company in which you wish to get involved.

At the same time check out the franchisor’s litigation history and find out if they have been convicted of any felonies involving deceptive practices, fraud, or franchise law related misconduct. This document will also show if the franchisor or any executive officers have had any litigation related to past franchisees, or any claims against them. A lot of unhappy past franchisees should be a warning sign to walk away.

You may also want to work with an accountant to calculate the cost that will be involved to actually start up your franchise. Keep your eye out for any undisclosed costs within the disclosure document, and remember to take into account the fact that your business could take several months to get off the ground so you will have to include your living expenses as well. If possible, contact other franchisees and see what it took for them to open up and get started within your chosen franchise.

You will also want to look into what kind of training and assistance your franchisor will offer you when you are getting started, and after your initial set-up. You should find out how many employees can receive training, how long the training sessions will last, what type of continual training will be available, and will someone be on hand to visit your franchise if you need more help? If you feel uncomfortable with the lack of support spelled out in the document, you should probably move on to a franchise arrangement you are more comfortable with.

Finally you will definitely want to look at the company’s financial history to find out how financially stable they are as an organization and what kind of plan they have for future growth and expansion. Do they have steady growth and do they take the time to support their franchise units properly? Go through the franchisor’s audited statements with a lawyer or accountant, and walk away from any business that appears financially unsound.

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