Questions to Ask Before Buying a Franchise or Business Opportunity

I recently gave a talk on how to vet a franchise or business opportunity. I thought you might like to see my handout. 

Questions to Ask Before Buying a Franchise or Business Opportunity

Keynote Address by Marty Nemko

Work at Home Business Expo, Apr. 29, 2011

The Office of the California Attorney General's site on business opportunities http://oag.ca.gov/consumers/general/business_opportunities  says:

Running a successful business involves hard work with long hours and substantial risks... Beware of any business offer that promises quick riches and short work weeks:

·        Be skeptical about earnings claims that sound too good to be true;

·        Obtain and review the state's required disclosure documents before you give the seller any money;

·        Talk to others who have purchased the business opportunity, but watch for people who are paid to be references or shills;

·        Do not automatically assume those promises of prime locations, speedy repairs and ongoing assistance will be there when you need them.

Here's a link to the Federal Trade Commission's similar but more extensive advice on how to evaluate a business opportunity: http://www.ftc.gov/bcp/edu/microsites/moneymatters/jobs-business-opportunities.shtml

Asking these questions can help you decide which if any business opportunity you should consider buying: 

Questions for a Franchise or Business Opportunity's Seller

1. Describe what you'll be providing me.

2. Describe what your most successful buyers of your business opportunity do that average and below-average ones don't.

3. May I see the SAMP Registration or Franchise Disclosure Document (FDD) you've filed with the state? (Sellers are required to provide it at least 48 hours before accepting payment. A sample SAMP is at www. oag.ca.gov/sites/all/files/pdfs/.../Sample_SAMP_Registration.pdf)

The document is required to include, for example, all costs and any lawsuits against the seller: disgruntled buyers, claims against patent, etc. Supplement by Googling the name of the business plus the words lawsuit, complaints, scam, and reviews. Ask the business owner about any litigation that worries you. A small amount of litigation is common even in good business opportunities but an excessive amount is a red flag.

The document reports only the range of buyers' income so ask:

4.  May I have a copy of the spreadsheet showing last year's profit for each of your business opportunity's buyers?  A verbal representation, for example, being told the average or projected profit, is far less helpful. Even if the seller gives you the spreadsheet, it is important to ask:

5.  May I have a copy of the current complete list of the buyers of your business opportunity and those who have sold or closed the business in the last two years? Of course, it's better if you can pick from the complete current list than to have to rely on a few hand-picked by the seller. The seller may reasonably withhold that list until you've demonstrated you're serious, for example, by completing a long application form. 

If the seller gives you only a few names, you may find others by Googling the firm's name.

Speak with five to ten buyers by phone and visit one or two in-person.

Questions for People Who Have Bought the Business Opportunity

Tell the buyer your strengths, weaknesses, work preferences and time availability and ask

1.  Knowing this business opportunity and a bit about me, do you think I'd be wise to buy one?

After getting an answer to that key overall question, ask about some or all of  these:

            a. net profit

            b. the quality and pricing of products the seller requires you to buy

            c. the seller's ethics and the ethics inherent in this business.

            d. the accuracy of the provided estimate of start-up costs

            e. satisfaction with the training provided

            f. satisfaction with the ongoing support

            g. satisfaction with the marketing support

            h. the typical work week, and how it's spent (including marketing)

            i. the skills that are critical

            j. Would you add another store/territory if you could?

Question for Potential Customers of the Product/Service You'd Be Selling

1. How likely are you to repeat-buy this service or product? Buy a few samples so you can show them to at least a handful of sample potential customers. Tell them the price. Sometimes, friends will buy one time from you as a favor and then go back to buying a bigger-brand-name or less expensive product. Urge them to be honest about whether they're likely to repeat-buy.

Questions to Ask Yourself

1. Am I a self-starter, not a procrastinator? Often long hours are required--and no one will be supervising you to make you work all those hours.

2. Am I willing and able to sell and market?  For example, have you, in the past, consistently been able to close deals while remaining ethical?

3. Will I follow the business opportunity's marketing/selling/service system? Everyone says they will, but many business opportunity buyers fail because they don't.

4. Does this business capitalize on my strengths and preferences? For example, cold-calling, night/weekend work?

5. Am I resourceful? Will I usually be able to solve the frequent problems that arise in running any business?  

6. Am I resilient when setbacks occur, or am I too likely start procrastinating?

Remember the lesson of my dad's story: Never look back, always take the next baby step forward.