According to federal statistics, the real estate industry has generated more $10 billion in corporate profits. That’s a large amount of money, so it’s no wonder why you may be considering purchasing a real estate brokerage franchise. While investing in a franchise can be profitable, it also comes with risk. 

Like all other types of investments, it’s wise to thoroughly analyze whether or not a franchise will be a good fit for your financial plan. It’s also a good idea to consult with an attorney or financial advisor to provide you advice on any setbacks that investing in a franchise may cause. The tips below are a good starting guide to help you analyze the franchise you’re interested in purchasing. 

Analyze and review the Franchise Disclosure Agreement.

The Franchise Disclosure Document is typically provided by a franchisor for any potential franchisees. This document is very important since it spells out many of the most important factors of the franchises’ operations. It also includes:

  •    The financial statements of the franchisor
  •    The background and experience of the franchises’ executive officers and board members
  •    How the franchisor pays for and advertises the franchise
  •    Any litigation information of the executive officers of the franchise
  •    Any litigation of any current and former franchisees
  •    Any supplier, territory and customer restrictions imposed on franchisees
  •    The initial and ongoing costs of the franchise
  •    The training and ongoing support provided by the franchisor
  •    Information about the termination, renewal and transfer of the franchise
  •    Information about the franchise system

Communicate with current and previous franchisees that you have access to.

  • The total amount the franchisee invested
  • The average monthly costs of the franchise
  • Feedback about the training and support the franchisor provides
  • Is the franchise making money or breaking even?
  • How long did it take the franchise to see profits, if any?
  • Has the franchisee ever had any issues or conflicts with the franchisor?

Analyze the marketing plan and support from the franchise.

As with any franchise, it’s important to analyze the franchisor’s marketing plan and support system. Since the lifeline of real estate businesses are leads, initial and ongoing support provided by a franchisor is extremely important. It’s also imperative to look for franchisors that allow you to be flexible with your marketing and lead generation strategy. 

If a franchisor does not allow for you to create your own marketing campaign then you should reconsider purchasing this franchise. This is because if you’re restricted from using a marketing strategy that could bring you good leads, this can quickly have a negative impact on your bottom line. If you feel that the franchise you’re considering has inadequate marketing support and too many restrictions then you should definitely look elsewhere.

Ask the franchisor follow-up questions.

After your review of the Franchise Disclosure Document, you should ask the franchisor any follow-up questions you may have. You should also ask the following questions:

  • What are the initial and ongoing costs?
  • What types of sales systems and marketing campaigns are currently being used? 
  • What are the results of these marketing efforts? How many failed marketing campaigns has the franchisor had?
  • Are there any marketing and sales restrictions for the franchisor? If so, what are they?
  • What type of initial and ongoing support does the franchisor provide their franchisees
  • How much are the royalty fees, if any? How often do the royalty fees have to be paid (quarterly, monthly, yearly)?
  • Are there any advertising and marketing restrictions?
  • Are there any restrictions on business operations?
  • Are there any design or site approval requirements for their franchisees?
  • How many franchisees have invested in the franchise location you’re interested in?

Analyze the total costs of owning and operating the franchise.

It’s extremely important to add up the initial and ongoing costs of owning the franchise you’re interested in purchasing. Be sure to ask the franchisor for the financial information of that particular location, especially the fixed and variable expenses. You’d want to take into account all of the potential costs, such as:

  • Initial fee(s)
  • Royalty fee(s)
  • Advertising fee(s)
  • Design and appearance costs
  • License and permit costs (if applicable)
  • Property leasing costs (including rent and utilities)
  • Training costs (if applicable)

Conclusion

Since the real estate industry can be difficult to succeed in, it’s no wonder why a real estate franchise is so attractive to real estate salespeople that want their own brokerage firm. With a ready-made marketing system and ongoing support, a real estate franchise can be an easier way to operate a real estate brokerage as opposed to starting one from scratch. But be sure to perform your due diligence and work with your advisors to ensure you’re making the right decision. If you do not have advisors, be sure to hire one. I don’t recommend anyone making such a hefty investment without thinking it through with those that have the knowledge to help you.