Entrepreneurs considering investing in a franchise have a responsibility to due diligence. To minimize risk and maximize your opportunity for success there are some key questions you should answer before moving forward.
What do you get for your franchise fee?
Every corporation is going to provide their own value for entrepreneurs looking to buy into the franchise, and each one will have their own cost for licensing fees. That can make navigating the process of purchasing a franchise a difficult one, especially when it comes to securing funding. There are a few key things to remember when you are applying for a franchise to help you understand the process.
It is important to understand what is covered by the franchise fee, and what will require additional costs. There is also the day to day costs that need to be considered. Staffing, Products/supplies, marketing, and other expenses will be more frequent expenditures and can add up over time. How big of a staff will your new business require? What products need to be purchased, how often, and in what quantities? Is marketing handled by the parent company, or will you need to spend on that as well? These may seem like smaller items, but they can have a big impact on the costs of your business.
These costs will be different depending on the company. Many purchases, like marketing or material, will be provided through the parent company’s distribution and supply channel. If this is the case than examining the fee structure to determine if cost increases are capped, how price to customer is handled and what estimated profitability look like are going to be important in determining if joining that franchise is a good choice
What are the financing options?
Understanding the options for financing will be one of the first items an entrepreneur needs to look at. They may be able to get approval for a bank loan or find financing from non-bank capital sources. Additionally, the parent company may offer to finance, but that might come at the cost of ownership stake or future profits based on the terms. This will be one of the first major decisions you make when buying a franchise, so understanding the source of capital will be important.
If you are looking for non-traditional sources of financing, are you working with a broker, and if so what lenders does that broker work with. Make sure they offer a wide variety of lenders so you can be sure to get the best offers. Remember competition is good.
What is the track record of other franchise owners?
You can tell a lot about whether a company is a good fit to franchise with based on what their previous franchisees look like. Understanding how frequently and for how long people maintain ownership of their franchises is important to determine if the company is a good fit. Large turnover in ownership or low franchise survival numbers is a sign that this company may be difficult to work with or not viable in the current marker.
It is also important to consider what the most common break-even point for franchisees’ startup investments is. Are they taking an extended period of time to break even, or even failing to do so at all? This is a clear warning sign that either the support of the parent company is insufficient, or that the market doesn’t have a desirability for the brand or their product.
What support is there from the parent company?
Most franchises will have at least a guide for new franchisees, but a good franchise will be able to aid in marketing material, guidance with major decisions, and essential aid as needed.
While most franchises will supply marketing material and products, they will require franchisees to purchase equipment or supplies from partnerships they form. Most companies will work with the franchise to find a location for the business, but each will have their own policy towards ownership, rental policy, and location.
Many will offer essential support for marketing but may limit how the franchise can market on its own, which can have an impact on the business success or an owner’s feelings of autonomy. Larger corporations, like major fast food chains, will have marketing packages that include commercials and physical advertisements. These packages will include a buy-in, however, the rates are often lower than the
Support doesn’t necessarily have to come from the parent corporation. If the company has a large community of franchisees or a support group that can help new franchisees it can be an invaluable resource. Make sure to look for groups that can help answer questions, or provide support.
Is owning a franchise a good fit for you?
Not everyone is a good fit for finance ownership. While they may own the business and day to day operations, franchise owners still need to answer to the parent company and the set of corporate rules which extend to their franchises. Additionally, there is a lack of control over the products your franchise sells. If you are looking to enter into an industry, but aren’t sure of how to move forward this can be good, but if you are experienced and want to control most of the options available to your clients it can be limiting.
Franchising can be a great way to start your first business and can be a great opportunity for an enterprising entrepreneur. However, it does have its limitations. So the key is to make sure that both the model are the specific franchise are right for you. If it is a great fit, we have a variety of financing options that can make it your business goals a reality. Give us a call and we’ll be happy to fill you in on the details.