Starting a franchise business is an exciting way to become your own boss and gain the advantages of owning a business while taking advantage of the support and network of an existing brand. Franchising appeals to many entrepreneurs because it offers the potential of a quicker return on their investment and the possibility of leveraging existing market share. But before you jump into becoming a franchise owner, it’s important to consider certain factors that will determine whether starting a franchise is right for you.
Know the Industry
Before investing in any potential business opportunity, it’s important to research the industry, the company, the franchisor, and other potential competitors. Ask yourself questions such as:
- “What is their track record?”
- “How much money do I need to invest?”
- “How much support does this franchisor provide?”
To answer these questions, look into the franchisor’s financials, operations, and customer service. When researching franchise opportunities, you must always request the Franchise Disclosure Document (FDD) from the brand since most private companies do not share this information publicly. By doing so, you can ensure that all of your questions will be answered and provide clarity on how to move forward in your decision-making process. This document shares the total investment, company background, financial statements, and more.
Understand Your Financial Investment
When starting a franchise business, having enough capital to cover all costs associated with setting up a shop is essential. Consider the franchise fee, real estate costs, equipment and inventory, marketing and advertising expenses, training fees, and other startup costs.
Before investing a large sum of money into a business opportunity, obtain the necessary financing. If you don’t have the funds upfront, consider taking out a loan or looking into different financing models. You can consider the following:
401(k) ROBS: The 401(k) Rollover, commonly referred to as Rollovers for Business Startups (ROBS), is an innovative solution specifically designed for entrepreneurs who wish to use their retirement account funds to launch or purchase a business. This option allows you to access your 401(k) or other qualified retirement plan funds without being charged a penalty fee or tax.
Small Business Administration (SBA): The Small Business Administration provides many loan options to help entrepreneurs start their businesses. The 7(a) Loan Program is the most utilized for real estate business purchases. It can also offer financial aid in other areas, such as working capital (short-term and long-term), debt refinancing, furniture, fixtures, or supplies acquisition.
Traditional Bank Loans: Banks offer secured and unsecured loans for entrepreneurs who need quick funds. However, these loans can only be secured with an excellent credit score or collateral. It would be best if you had a credit score of at least 700 and collateral such as real estate or a large sum of cash.
Understand Your Investment
Franchise ownership comes with a considerable initial investment and ongoing fees paid to the franchisor, such as royalties and advertising fees. Consider the following when evaluating franchise investments:
Royalty Fees: Most franchisors require their franchisees to pay royalty fees after making the initial investment. These are typically monthly or annual gross sales percentage, which helps cover support services such as marketing, technology, and training.
Advertising Fees: Many franchisors require their franchisees to pay back a percentage of their sales into the company’s advertising fund. These funds cover some or all of the costs associated with marketing and promotional campaigns.
Initial Investment: The total initial investment includes all costs associated with starting a business, such as real estate, equipment, furniture, fixtures, inventory, training fees, etc. It is essential to consider these costs before making a final decision.
Understand What You Are Signing Up For
Once you have identified an opportunity, it is important to read through all documents thoroughly before signing on the dotted line. This includes any agreements or contracts. Ensure all terms are understood and agreed upon by both parties before committing financially or otherwise. If there are any areas of confusion or concern, discuss them with the franchisor before making a final decision.
Before signing up, you may want to look for the possible red flags:
- High initial fees, royalties, or other costs: Be sure to thoroughly investigate the franchise’s initial investment and ongoing costs before making a decision
- Limited control over operations: Before signing up, review all documents to ensure you have full autonomy in the day-to-day running of your business
- No right of withdrawal: If the franchise agreement grants no right to withdraw your investment, be sure to seek legal advice before signing
- Unrealistic expectations: Franchisors should not pressure you into signing a contract. If they are overly aggressive, it may indicate that the franchisor is less invested in your success than you.
Investing in a franchise can be an excellent way to start a business. Still, ensuring that you are comfortable with the investment and understand what you are signing up for is important. By following these steps, you can be confident in your decision and that your franchise venture will succeed. Good luck!