18 Feb 5 Key Considerations for Buying a Franchise
There are a lot of upsides to owning a franchise. It is a popular route to business ownership as it allows you to purchase a ready-made business where a great deal of the planning, trial and error, risk assessment, and foundational work has already been done. With a franchise, you are purchasing a proven, developed brand and product(s) or service(s).
However, not all franchises are created equal and there can be downsides and areas for concern. Before pursuing a franchise opportunity, there are five main things to consider.
Franchising can be an expensive endeavor. The initial fee typically covers training, support, and assistance with site selection. After the site is selected, you are usually required to cover all build-out costs such as any necessary remodeling, furniture, fixtures, equipment, and signage.
If you are purchasing a restaurant or a product-based franchise, you will have to buy supplies and/or inventory. You also need to be prepared to not turn a profit right away. It is recommended you have enough working capital to cover business expenses for at least 3 months and personal expenses for a year.
Finally, you will need the funds to consult a franchise attorney for reviewing and drafting legal documents, and an accountant to help you establish the business and who may also act as a financial advisor. You may also need to hire a business plan writer if you will be applying for financing.
As you can see, the costs are varied and can add up quickly. In most cases, people require financing beyond their personal savings. Make sure to explore all your options. Franchise financing and bank loans are some of the most popular but alternatives exist such as crowdfunding and loans from friends or family.
Understanding how rigid or flexible you prefer to be can help you determine if you want to primarily look to new or established franchises. Your current savings, personal credit, and financing options can help you make this determination as well. Newer franchises may be riskier, but are often less expensive. Further, they tend to look to new franchisees for input to help refine their systems, which gives you more say. They are typically more amenable to negotiation on fees and requirements as well.
On the flip side, if you love the ease of having well-defined systems and structures and don’t crave control, change, or much input, established franchises may be perfect for you. Established franchises also tend to carry less risk, but are usually more expensive.
As we’ve seen, newer franchises can offer some advantages but they tend to carry higher risks. In an established franchise, you will have years of history to inspect as well as dozens or hundreds of existing franchisees to look to. Things like years in business, how many franchisees they have, and franchise closure rates are highly indicative of the likelihood of success.
If you are considering a newer franchise opportunity, the basis of your decision will be on the original business. You will want to see how long they have been in business, how long they have turned a profit, and how steady that profit has been. You will also want to get as much insight as possible into their training and systems. If you’re going to get involved with a less established franchise, make sure you do very thorough research and plan to hedge your bets further on the amount of working capital to set aside.
You’ll want to investigate things like if the franchisor has ever been involved in a lawsuit. You should also ask to speak to existing franchise owners. Most franchisors that have great working relationships with their franchisees will encourage you to talk to them. You’ll want to ask them if they are happy with their current success, how long it took them to be successful, and any hurdles they may have encountered along the way. This is an opportunity to get inside knowledge on how things will be from your side.
Further, you want to consider their brand. While they may not be well-established, you do want to ensure it’s something you’re excited about. Being a franchise owner is hard work, and you will have to put the work in to be successful. The best way to find success is to be representing a brand that excites you. It should also be a brand that aligns with your ideals.
There’s a good chance that if you’ve talked to existing franchisees and they are thriving and happy with their relationship, the franchisor has well-developed systems and they offer proper training and support. This is something that you will want to hear about from both the franchisor and existing franchisees. You want both sides to tell you the same basic information about how training and support work, and you want to know that both are pleased with the relationships.
Once you’ve made the decision to franchise, Joorney is ready to help you create your specific franchise business plan. These plans have helped dozens of prospective franchisees secure the funding they need to launch the business of their dreams. In addition, our Premium Market Research service can help you make the best decision on location, ensure you fully understand your competition and target markets, and more.