Jul 19, 2019

Factors to Consider When Buying a Franchise

Becoming a franchisee is one of the best ways to become your own boss. Generally, the costs are known, the risks understood, and customers already know the brand. A lot of the mystery of owning a small business is broken down.

Even though the path may be paved, though, don’t think that opening a franchise is easy. There are many issues to consider when thinking about opening a franchise, ranging from your credit score to competition from other franchisees.  

Your Personal Finances

Before considering opening a franchise–or any small business–you should take a hard look at your finances. Your personal financial situation is separate from your business finances, but almost any lender will look at your personal financial history to make a decision. This scrutiny especially applies if you have never owned a business before. Lenders will consider your personal credit score and compare your assets and debts. Your financial stability will come under consideration–lenders will look at how long you live in one area or stay at your jobs.

Initial Franchising Costs

The initial costs for opening a franchise can range wildly. A company you can run from your garage or home office will cost significantly less than one that requires the construction of a restaurant. A general rule of thumb when it comes to franchising is that the initial investment for a single unit franchise will cost between $100,000 and $300,000. Unless the franchise units are very small-scale, companies typically charge new franchisees $20,000 to $50,000 in franchise fees alone. In terms of funding, franchise owners commonly pay some 20% of the initial investments from personal funds.

Ongoing Operating Expenses

Initial franchising fees go toward different costs depending on the company. Sometimes the fees will go toward assistance with site selection and training. In other cases, it is merely a fee for branding rights. Either way, you will want a deep understanding of how much it will keep your franchise going beyond the first few months. Look over information provided by the company, including the Franchise Disclosure Document (FDD), especially inventory costs and build-out costs. There will also be accounting fees and you will likely have to hire employees. Coming up with a solid business planning document for your franchise will help immensely.  

Other Franchisee Successes

As you consider opening your franchise, seek out the counsel of others with a similar experience. Set up a meeting with someone who has found success as a franchisee, ideally with the same company you are considering. Although it is possible they may not want to help upstart competition, small business people are generally supportive of each other, so don’t be afraid to ask for a coffee meeting. They will have good information about reaching customers and exposing hidden costs. Most importantly, they will be able to give you the truth about operating a franchise outside the biases of the company headquarters.

Franchise Track Record

Beyond speaking to other franchisees, try to find hard data about the company you are interested in becoming a part of. You may have to go beyond the information available directly from the corporate headquarters–it is possible that a company wants people to become franchisees knowing they are taking a big risk. Along with speaking with experienced franchisees, search media reports and quarterly earnings reports, if the company in question is publicly traded.

Outside Funding

As a small business owner, there are many avenues to receive funding for your franchise dreams. The parent company itself might offer franchise funding, but pay close attention to the terms. It is common for franchise owners to dip into personal funds or tap family and friends for capital. If this is not possible, traditional lenders like banks provide loans for franchises, but they will probably only be interested if you are seeking a large loan. They will require stringent documentation as well as background checks. For smaller loans, there is a whole realm of funding options beyond banks, many of which are available online.  

Your Future Competition

Before signing any documents or searching for funding, research what the competitive landscape will look like for your franchise business. If you are opening a physical business, take a close look at similar options nearby. Are there enough customers to support another entry in the region? Does your company offer options that can best items from competitors? If the franchising company is well-established, there will very likely be other franchisees of the same company somewhere in the area. If possible, try to go through the customer experience–buy a cheeseburger or a piece of clothing–to understand where the competition succeeds and how you could improve upon their approach.  

It takes a little cash to change the world.

So what are you waiting for?

About the author

Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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