Buying into a franchise is a tempting way to start a business. Instant name recognition, professional training, and a proven business model are a few of the items that we can safely put in the “pros” category. The thing to remember is that even with the name and resources of a well-known franchise standing behind you, any small business venture is fraught with uncertainty and risk. It might not happen as often as unaffiliated businesses but popular franchise endeavors do go out of business with regularity. Before you take the plunge, consider these seven factors when evaluating the possibility of buying a franchise.
- The Business Model
Before anything else, you need to understand exactly how franchising operates, according to East Coast Wings & Grill. The idea is that you, as an entrepreneur, can buy what is essentially a turnkey business that should allow you to hit the ground running in almost any community in America. In return for a franchise fee, you receive the rights to use the company name within a defined territory for a certain length of time. Many franchises help you secure a location based on their market research, provide initial training and operating manual, and offer management support on an ongoing basis. Rights and obligations are contractually defined upfront.
The initial cost to buy into a franchise is called the franchise fee, which can range from a few thousand to a few million dollars depending upon the particular franchise you’re interested in. Other initial costs include rent or purchase of an operating space, build out according to franchise specifications, and initial inventory. You will pay royalties – a percentage of weekly or monthly gross income – to the franchisor for the duration of the agreement. Also expect that you will be required to kick in money to an advertising fund that goes to run national and/or local spots.
- Franchisor Controls
A major difference in buying a franchise is that the parent company can exert a great amount of control over how you run your business. For example, your location must be approved. You also cannot change which goods and services you sell on a whim. This congruity is a staple of the franchising idea. It’s why you know what your menu choices are the moment you walk into any Subway in America. Another common restriction is where you can operate. This is known as a territory and might be exclusive or not. You need to know up front if the franchisor has the option to sponsor other competing venues.
- Selecting a Franchise
You might have had your eye on a particular franchise for a long time and know exactly what you want to do with it. Remember, though, like any investment, it comes with risk. Some considerations:
- Is there enough demand in the area?
- How much competition is there?
- Have there been complaints about the franchise?
- Are you confident in your own ability to run a business?
These and more questions need an honest assessment and answer before taking the plunge.
At some point in the evaluation process you should check out sources like the Better Business Bureau to see if there have been complaints about the way the franchisor operates. Some problem areas include failure to implement training or maintain support channels. The last thing you want as a new entrepreneur is to pay a chunk of change for the benefits of a franchise only to learn they aren’t all they’re cracked up to be.
A growing franchise is a good thing, right? The truth is – yes – up to a point. It’s not impossible for franchise to grow so fast that it exceeds its capacity to provide support to local franchisees. Take the time to research the company’s public financial records. Pay close attention to resources and assets, as well as how many additional locations it plans to open. Too much, too soon, and you could be left holding the bag.
- Franchise Broker
Though they go by a thousand names (business coach, adviser, sales consultant), a franchise broker is a third party who gets paid by the franchisor to find franchisees. A broker reviews the money you have and helps evaluate which opportunities are available. He or she often helps a potential franchisee complete the application process.
Probably the best advice to an entrepreneur interested in procuring a franchise is to take your time. Though you may be ready to open the doors tomorrow, be a tortoise in this process. You only have one chance to do it right the first time, and don’t want to spend a lifetime regretting it.