If you are thinking about buying a franchise in 2023, you are not alone. As a whole, the franchise industry is continuing to expand, and market analysts are predicting continued growth over the next five years.
But, before jumping in, prospective franchisees need to make sure they are making informed decisions. Buying a franchise is a long-term investment, and if your franchise isn’t successful, you could face significant financial losses.
What To Do Before You Sign a Franchise Agreement in 2023
So, how do you make an informed decision? Here are 10 steps to take before buying a franchise in 2023:
1. Make Sure You Can Afford It
While many prospective franchisees focus their financial analysis on the future (i.e., on how much they can make once their franchise becomes profitable), it is important not to overlook the present. While most of the news coverage related to the Federal Reserve’s interest rate increases has focused on mortgage rates, these increases are affecting borrowing costs across the board.
A year ago, the Small Business Administration (SBA) 504 loan interest rate was around 2.79 percent for a 10-year loan. Today, the 10-year SBA 504 loan rate is around 6.53 percent. This is a big difference that significantly impacts the cost of franchise ownership for those who will be financing their purchase (as is the case with most first-time buyers). With royalties and advertising fund fees on top of ordinary business expenses, today’s interest rates may make it particularly difficult to make buying a franchise worthwhile.
2. Explore Multiple Franchise Opportunities
Once you perform your initial financial analysis, the next step is to explore your options (assuming it makes financial sense to do so). Even if you have a particular franchise in mind, it is important to evaluate multiple franchise opportunities before committing to a particular system. Once you do your research, you may find that the brand in which you were interested previously is not the best option from a business perspective.
These days, almost all sectors within franchising are highly competitive. So, if you are interested in a fitness franchise, look at multiple fitness franchisors’ offerings. If you are interested in a business services or home services franchise, review multiple franchisors’ Franchise Disclosure Documents (FDDs).
3. Carefully Evaluate Each Franchise Opportunity
When exploring your options, there are several factors you will want to consider. While the financial prospects of a franchise opportunity are important, there are several intangible characteristics that will play a role in determining your likelihood of success. For example, some of the key considerations for buying a franchise in 2023 include:
- Does the franchise concept have staying power?
- Is the franchise system sound?
- Are any major changes on the horizon?
- What are the terms of the franchise agreement?
4. Talk to Several Current and Former Franchisees
Even if you are doing your research during the holiday season, you should not hesitate to reach out to several current and former franchisees of each franchise system you are considering. Regardless of the time of year, most will be more than happy to tell you about their experience. Be prepared with a list of questions, but also be prepared to listen. Unsolicited opinions are often the most honest, and the more honest and unbiased insights you can gather, the better.
5. Read the FDD and Franchise Agreement
When evaluating franchise opportunities, you have to read the FDD and franchise agreement. There is no way around it. So, set aside a few hours, get a cup of coffee, and dig in.
Start by going through each Item of the FDD, highlighting important sections and making notes where you have questions. Then, turn your attention to the franchise agreement. Review the table of contents to get acquainted with the structure of the agreement, then go through it section by section. Write down any questions you have (it is not unusual to have lots of questions), and pay particular attention to any clauses that appear to be inconsistent with what is in the FDD.
6. Hire a Lawyer to Analyze the FDD and Franchise Agreement
While it is important to review the FDD and franchise agreement yourself, you also need to hire a lawyer to analyze each document in detail in light of his or her experience in franchising. Hiring a lawyer to analyze the FDD and franchise agreement is one of the most important steps in the due diligence process. Making a smart investment is all about making informed decisions, and if there are deficiencies in the FDD, concerns about the franchisor’s system, or unreasonable terms in the franchise agreement, these are all facts you need to know.
7. Plan Out the Pre-Opening Phase
Once you decide that you are ready to move forward, there are still some steps you should take before signing the franchise agreement. Once you sign, you are locked in, and you will have a deadline to open for business (in most cases).
One of these steps is to plan out the pre-opening phase. How will you meet your deadline to open? Going through this process can also help you identify any oversights you may have made previously.
8. Pick a Location (if Applicable)
Another step to take before you sign is to pick a location for your franchise (if applicable). The location of your franchise can have a huge impact on its profitability, and you do not want to sign a franchise agreement only to find that there are no suitable locations available.
9. Identify Vendors and Suppliers
In this same vein, you should seek to identify vendors and suppliers for your franchise at this stage as well (though you may need to use mandatory suppliers for certain items). Again, the goal is to do as much preparation in advance so that the process of opening your franchise is as smooth and efficient as possible.
10. Negotiate the Franchise Agreement
Finally, you will want to work with your lawyer to negotiate your franchise agreement. All franchise agreements are one-sided in favor of the franchisor. While your franchisor may be unwilling to negotiate certain terms, good franchisors will be willing to consider reasonable requests for clarifications and modifications.
Discuss Your Franchise Opportunity with Lawyer Jeffrey M. Goldstein
Lawyer Jeffrey M. Goldstein has well over 30 years of experience in the franchise industry. If you are thinking about buying a franchise, he can help you make an informed decision and negotiate your franchise agreement on your behalf. Call 202-293-3947 or contact us online to get started with a free consultation.
