Purchasing a franchise can be a lucrative way to start a business. Many franchises are established businesses that have a strong base of customers.

Although franchises have the potential to be profitable, you should proceed with caution. Here are a few things that you should consider when buying a franchise.

1. Financing

Depending on the franchise, you may have to invest hundreds of thousands of dollars into the venture to get started. If you aren’t independently wealthy, how will you get the money?

The most common way for franchisees to finance their businesses is through loans from financial institutions. To qualify for the best rates, you’ll be required to have excellent credit and a strong financial portfolio.

Before you approach a bank for a loan, you should research interest rates and determine what’s affordable for your situation. You can use a loan calculator to determine the amount of money that you’ll be required to pay for a business loan.

2. Type of Franchise

Selecting the right franchise that fits your situation can mean the difference between success and failure. It’s important to select a franchise that is conducive to your lifestyle and goals.

If you don’t like the idea of spending 12 hours a day in a greasy restaurant, then a burger franchise may not be the best selection for you. Regardless of the income potential, you won’t enjoy the experience if you aren’t fond of the business.

Before you make a decision, there are a few things you should take into consideration. How many hours would you like to work a day? What can you afford to invest in the franchise opportunity? How long will it take your franchise to turn a profit? Can you withstand a downturn until your franchise gains traction?

3. Industry Evaluation

Although the economy may be in a good position today, what happens if another recession takes place? Is the franchise in an industry that can thrive in the event of a financial downturn?

As you evaluate any franchise opportunity, your goal is to determine recession-proof industries. These industries include candy, bakeries, luxury goods, repossessions, education, alcohol, discount retail, health care, funeral services and information technology.

4. Franchise Disclosure Documents

It’s essential that you thoroughly investigate every franchise opportunity. After all, you’ll be investing a small fortune into the business. You want to be certain that the opportunity is a sound investment.

Review each company’s franchise disclosure documents to determine the strength of the business. These documents will help you determine each company’s level of financial stability. Here are some questions that you’ll be able to answer after you read the financial disclosure documents.

  • Is the company on the brink of financial ruin?
  • Are there any lawsuits pending against the company?
  • How much revenue did the franchise generate in the previous years?
  • How strong is the industry?
  • What are the names of the executives in the franchise?

Opening a franchise in your area is a smart way to begin your business journey. Use these tips to help you make sound decisions before you sign a contract for a franchise.