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Question added to topic FranchisesMarch 12, 2010

What questions should I ask if I'm buying an existing franchise?

I would love to know what information I need in order get the full picture about whether the franchise will be profitable.
You're in luck!

It is much easier to get a good answer to your question in the case of buying an existing franchise because it already has an operating history you can review.

You can simply ask the existing franchisee that is selling the unit for copies of the historical financial statements and review the revenue, expense and cash flow record the store has produced. You may have to sign a non-disclosure statement before they will give you access to the data but this is a normal request.

Always make sure to ask the franchisee if there are expenses in the financial statements that are not absolutely necessary for running the business.

It is quite common for the owner of a small business to write off many expenses in the business (like their car or season tickets they may use for business entertaining) that are not strictly required for the operation.

Since you won't have to have such expenses yourself, you can add these back in to the cash flow line to get a true picture of what the earnings would be if you owned the business.

Even in the case of an existing business, I would still call a number of other franchisees with the company. Ask them about their experiences with the franchise and especially about trends in the business. You always want to make sure that the current owner isn't selling because they believe the business has peaked and is about to head downhill

Good luck!

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.

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