Choosing a Franchise
You have the opportunity to choose from thousands of available franchise brands. Some of the most popular industries for franchises include restaurants, health and beauty, fitness, business services, and retail. The top brands include household names such as:
- Taco Bell
- UPS Store
- Planet Fitness
- Great Clips
- Jersey Mike’s
- Ace Hardware
- Pizza Hut
- Sport Clips
- Smoothie King
These businesses offer prime advantages associated with global name recognition but also come with some of the steepest price tags on the market. On the other hand, you could buy into a less established brand for a fraction of the price. You’d just need to verify that they would provide the supply chain, training, marketing, and other support to help you be successful.
Perhaps the most important factor in your franchise decision should be how passionate you are about the business. Will you be motivated to help your business thrive, or will you dread getting out of bed in the morning? It’s also preferable for you to have experience working within the industry, as that hands-on knowledge can pay dividends in the crucial first year of operation.
If you feel compelled to purchase a franchise in an industry you have little to no experience in, at least make sure you have a trusted mentor who can help you navigate everything. Your mentor should be someone who not only worked in your chosen industry but excelled in it. If you have trouble finding a mentor from within your network, you can connect with a local SCORE office to find possible candidates.
You should always work with a mentor, regardless of your experience level. The insights and wisdom these individuals provide can be more valuable than any training or certification you could ever acquire.
Formulating a Plan
Just because a franchise provides you with a business template doesn’t mean that you won’t need a plan of your own. Business plans lay out your key objectives for the franchise and how you intend to accomplish them.
A helpful way to approach the planning process is to answer a series of questions. As you write down your responses, the structure of the plan falls into place. Here are some potential questions to consider:
- What will be your main objective?
- What will be your primary strategies?
- What will be your mission statement?
- What did your market analysis reveal?
- What did your competitor analysis reveal?
- What are your financial needs?
- What are your financial projections?
You obviously won’t be able to answer all these questions at the onset. Take time to dig into the research and lean heavily on your mentor’s knowledge.
“Research and analyze your product, your market, and your objective expertise,” says the Houston Chronicle. “Consider spending twice as much time researching, evaluating, and thinking as you spend actually writing the business plan. To write the perfect plan, you must know your company, your product, your competition, and the market intimately.”
Your business plan will serve as a hub for all your business-related activities. The franchisor will want to review it as part of the application process, lenders will scrutinize it when you seek financing, and it will be your north star as you work to get your business off the ground.
Contacting the Franchisor
After narrowing down your list of potential franchises, you’ll be ready to contact your top choice. In most cases, the franchisor will respond by instructing you to fill out their official application. Much of the information from your business plan will come into play here because the franchisor must ensure you have the industry experience and financial foundation to open and operate a business.
If you pass the application review, you’ll likely be asked to come for an in-person interview. This meeting is where you’ll have the opportunity to share more of your personality, interests, and motivations for buying into the franchise.
Plan on the franchisor asking lots of questions regarding your familiarity with the franchise model and your ability to adhere to it. Established businesses take their brands very seriously and are reluctant to turn the keys over to anyone who doesn’t want to play by their rules.
This interview also provides you the chance to ask questions and get into the nitty-gritty details that aren’t included in the brochure. Perhaps what you’ll hear will only reinforce your desire to become part of the franchise. Or you might learn some things that change your mind.
Assuming both you and the franchisor are pleased with the results of the interview, you will be presented with a franchise contract. Don’t sign these documents before getting expert advice from your mentor and an attorney. Once you feel confident that everything you need to have included is present in the contract, you can sign on the dotted line and officially usher in your life as a franchisee.
Adding Structure to Your Business
Nearly all franchisees in the United States are required to have an Employee Identification Number (EIN). To determine if you fall into this camp, review the following questions provided by the IRS. If you answer yes to 1 or more of them, you’ll definitely need an EIN.
- Will you have employees?
- Will you operate your business as a corporation or a partnership?
- Will you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Will you withhold taxes on income, other than wages, paid to a nonresident alien?
- Will you have a Keogh plan?
- Will you be involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Nonprofit organizations
- Farmers’ cooperatives
- Plan administrators
The process of getting an EIN is simple. Just go to the application page on IRS.gov and you’ll find detailed instructions.
Next, create a bank account for your business. The most streamlined way to handle this task is to simply add a business account at the bank where you already have personal accounts. Your other option is to find a reputable bank that’s offering incentives for new accounts. While the setup process will take longer at such a bank, it’s always nice to score cash or other rewards for taking care of a business necessity.
One of your final steps will be to choose a legal structure. Carefully review the options and seek the expert opinion of an accountant.
“Of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your company,” explains Entrepreneur. “Not only will this decision have an impact on how much you pay in taxes, but it will affect the amount of paperwork your business is required to do, the personal liability you face, and your ability to raise money.”
While the franchise world is full of established processes, there isn’t an obvious choice when it comes to your business’s legal structure. Each option provides unique benefits and you’ll need to carefully weigh them out to find the ideal match for your situation.
Here’s a closer look at 3 of the most common:
- Limited Liability Company (LLC): This is one of the most popular business structures available. It is easy to set up and costs less than other options. The primary benefit is that LLCs create a barrier that protects you from the financial liabilities of your business.
- Partnership: As the name implies, this structure is ideal for situations where you’ll share the ownership of your businesses. In a partnership, all parties have an equal share of the business liabilities and revenue. In a limited partnership, there are full owners as well as owners who have more limited roles.
- C Corporation: This structure creates your business as a separate legal entity so that you have protection from liabilities, similar to an LLC. The downside is that setting up a C Corporation is a timely and expensive endeavor.
Once you’ve reviewed the options, you can initiate the process of formally setting up your business. Give yourself plenty of time so that you don’t make any errors and can feel confident that you’re choosing the best structure for you.
Sorting Out Your Finances
Just like any other business owner, you will need to budget for equipment, inventory, and other expenses. The franchise model also includes unique fees, such as the up-front franchise fee. This fee will vary depending on whether you’re joining a large brand like McDonald’s or a more regional option, but it is usually tens of thousands of dollars. Additionally, the franchisor will likely take royalties and marketing fees in the form of a percentage of your sales.
“Buying a business is more than likely one of the most substantial investments a person will make in their life,” says Forbes. “All of this is not to say the end result isn’t worth it; rather, investing in a franchise is an excellent way to escape the corporate grind and go into business for yourself, but not necessarily by yourself. The franchise model is set up in a way that makes a proven, successful business replicable, provided the person signing the franchise agreement puts in the work and follows the necessary systems and processes.”
During this process, you’ll draw upon the financial projections and funding strategies you outlined in your business plan. Ideally, you’ll be able to invest personal money in your business. You can also consider borrowing from friends and family, though this is an arrangement that requires diplomacy and care.
Beyond your inner circle, you have a full spectrum of financing options. Each financing product has unique benefits and limitations, so do your due diligence.
- Franchisor Financing: Some franchisors provide financing directly to you. The benefit of this approach is that the franchisor understands the specific expenses and challenges associated with your operations, so their financing could fit your needs like a glove.
The drawback is that it might not offer competitive rates and terms. Because the franchisor is working directly with franchisees and not trying to attract customers from the general market, they sometimes inflate the rates or sneak hidden fees into the fine print.
- Equipment Financing: Most franchises require an investment in equipment, whether it’s refrigerators in a Taco Bell or computers at a UPS Store. Equipment financing is ideal because it has lenient qualification standards and can provide up to $5 million so that you can get your business up and running.
The unique structure of equipment financing allows for the equipment you’re purchasing serves as collateral on the loan. This can be an issue in the case of a default because you would have to forfeit the equipment to the lender.
- SBA 7(a) Loans: Loans from the Small Business Administration (SBA) are beloved for their borrower-friendly rates and terms. The arrangement is unique, as the SBA doesn’t actually provide any other funds. They just serve as the intermediary, connecting you with a verified lender. The SBA then guarantees a portion of your loan, which reduces the risk for the lender and makes them more willing to give you a great deal.
The SBA’s 7(a) Loans are chosen by more business owners than any other products offered by the agency. They’re flexible enough that you can use the funds for all kinds of expenses related to your franchise, including real estate, equipment, or inventory.
One drawback to SBA 7(a) loans is that the application is labor-intensive, and the funding process can take months to complete.
- SBA Express Loans: Say hello to the sleeker, faster version of SBA 7(a) Loans. An SBA Express Loan requires less paperwork, and the application process moves faster. In some cases, you can get an approval decision in just 48 hours.
The main drawback of an SBA Express Loan is that they top out at $350,000, while a 7(a) loan can provide as much as $5 million.
- Business Lines of Credit: Like a credit card, this type of financing gives you access to revolving credit. Whenever an expense arises, you simply pay for it with the line of credit and then repay that amount (plus interest). Approvals are fairly liberal with this type of financing, making it great for those who have struggled to obtain financing in the past.
One possible downside to a line of credit is that the interest rates can be higher than with other types of financing.
- Term Loans: These workhorses provide as much as $2 million for your franchise. Better yet, they often fund in as little as 2 days. You can use the money for a wide range of expenses, making them a perfect fit for the startup phase of your business.
There aren’t many downsides to term loans. One possible issue is that you might struggle to get approved if your credit scores aren’t strong.
It might feel overwhelming to consider all the steps necessary to launch a franchise. Just remember that the best things in life always require effort. Rather than tackle everything at once, focus on mastering one challenge at a time. This incremental approach will help you avoid burnout as you progress toward opening day.
You are embarking on a thrilling journey. And the fact that you’re following your entrepreneurial dreams will provide the fuel you need to navigate challenges and pursue long-term success.