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Eight Things to Consider Before Purchasing a Franchise

As a potential franchisee, you have certain expectations - in particular, that the franchise you are about to buy will be profitable and will retain its value. To make the right decision, it's up to you to investigate before investing.

BMO Bank of Montreal can help you with the investigation process. We suggest you ask the following questions about eight important issues of franchise ownership. The answers to these questions, and to others you will no doubt think of, will help you decide whether a particular franchise - or franchising itself - is the right business decision for you.

Consumer demand for the franchisor's product or service

  • Is there a strong consumer demand for it? Is the demand expected to continue?
  • Are there competitors? Could more competitors enter the market in the next few years?
  • Is the product or service of outstanding quality?
  • How does its quality compare to the competition?
  • Are you confident you can market the franchisor's product successfully in your marketplace?

The franchisor's business track record

  • What's the story on the franchisor's business record and reputation?
  • Have you spoken to existing franchisees?
  • Have you contacted government consumer protection agencies, Canadian Franchise Association and Better Business Bureaus?
  • Is the franchisor's infrastructure comprehensive and stable?
  • Are there any outstanding legal actions against the franchisor?

The proposed legal agreement between yourself and the franchisor

  • Have you reviewed it with an independent lawyer who specializes in franchise law?
  • Are the terms of the agreement in line with your expectations?
  • Does it cover the challenges you will face in running an independent business?
  • Do you feel pressure to sign before you're absolutely ready?

The nature of the franchise fee

  • How is the franchisor compensated?
  • Is the franchisor reimbursed over the long term through the distribution of goods and services?
  • Does the franchisor receive payment up front?
  • What are the royalties, fees and expenses you will have to pay to the franchisor up front? On an ongoing basis?

The financial strength of the franchisor

  • Is the franchisor financially strong and stable?
  • Does the franchisor provide financial information which you can take to your accountant?
  • What is the background and experience of senior management?
  • Are you confident the franchisor will still be in business many years from now?
  • Does the franchisor make available a voluntary disclosure document?
  • Will the franchisor provide you with financial assistance?

The franchisor's financial interest

  • Does the franchisor own the land or building?
  • Is the franchisor prepared to go on the head lease?
  • Will the franchisor provide you with financial assistance?

The franchisor's plans for expansion and growth

  • What is the franchisor's plan for targeted expansion?
  • What are the target markets for growth?
  • Will your franchise be located where the traffic and demand are likely to be?
  • Are you assured of exclusive rights to the franchisor's product and service in the area where you wish to locate?

The franchisor's market intelligence and market research capabilities

  • Does the franchisor thoroughly research new markets using reliable and credible market research methods?
  • Will you, as a potential franchisee, have access to marketing and product information regarding your industry as well as your specific business?
  • What forms of ongoing field support and assistance are provided, and how do they work?
  • Will the franchisor assist you in the development of your business plan?
  • Are there any special training, education or other requirements the franchisor would ask of you?
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