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Top questions to ask a franchisor

Franchising is huge. It is because of franchising that you see a McDonalds in every city, and you see some smaller companies grow quickly. If you have the money you can buy a franchise, however, when you buy a franchise, you're putting big dollars on the line, and you have to be careful. One of the pitfalls of buying a franchise is you are not the only one that determines whether or not you succeed. Other stores, other franchises, and the overall policies are often out of your control and can reflect either negatively or positively on you.

So, when you buy a franchise there are some important questions you will want to ask the franchisor. The quality of the company that stands behind your franchise matters, so before you spend your money, ask the following questions:

1. How much will you have to pay in royalties? Of course you want to ask the money questions. You buy a franchise to make money, so you need to know stuff like this. Franchisors generally charge royalties equal to 3 percent to 6 percent of each franchise's revenues. That is the typical number, so if you find one that charges significantly more consider negotiating, or looking elsewhere.

2. How much money will your business really make? You have to realize that the parent company wants you to buy a franchise, it is just like going to a used car lot, they are going to show you everything right with the used car, and neglect to mention the AC doesn't work. So, be careful, the parent company's projections probably are ALWAYS optimistic. Do your due diligence and contact other franchises to get real numbers.

3. What type of franchise is it? This does not mean is it a food place, or another business type, it means is this a package franchise or a product franchise? Most franchises are "package franchises". So what is that? This would be a business that comes complete with a business model laid out by the parent company. The parent company makes the decisions about this business model, and when you buy into the franchise you agree to that model. That model covers everything from financial controls to hiring guidelines, so you want to be careful. "Product franchises" are the other type of franchise you will run into. This type of franchise is there mainly to distribute the parent company's goods. Owners of product franchises have more control over the way they run their businesses. So, before buying into a franchise assess the amount of control you want vs. the amount you will actually have.

4. Does the business lend itself to the franchise model? You can make a franchise out of anything, but that does not mean it will work. So, before you plunk your money down you want to really look at whether or not it is a wise choice of franchise. Fast-food businesses, for example, is a great choice as you can really benefit from the association with the brand name and products of the franchisor. However, this is not the case for every business.

5. What does the offering circular say? When you buy into a franchise you will be given what is called an offering circular. The Federal Trade Commission requires franchisors to provide prospective franchisees with an offering circular that contains basic facts about the company. This can be very useful and helpful to you when you are trying to determine if this is the right financial step for you. The offering circular will have information about the firm's business experience, legal history, and its other franchises. This should be a big indicator of how successful your franchise is going to be.

6. How many franchises does the organization have? This should be one of your top questions. Why? Because a large number of franchises indicates a successful, established business. This means less risk for you, and better chances your investment will payoff. However, if they have too many franchises in the area, you may be cutting into each other's market shares. You would not want to compete with an identical business so check that out first.

7. Can you work with these people? When you buy a franchise, you don't just get the name and same menu etc. You get a relationship. You'd better be able to work with your new bosses, as that is essentially what the parent company is. Ask the franchisor what they do with disputes or problems between the parent company and the franchises.

8. How will the franchisor help you? This is an important question as it is always important to know what your responsibilities will be, and what the parent company will worry about. Often times, a franchisor may help you select a site for your business, advertise for and interview prospective employees, get business licenses, etc. Always ask what the franchisor will do for you - and get it in writing or it probably won't happen.

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