8 Things You Need to Know Before Buying a Franchise
What are the 8 Things You Need to Know Before Diving in Buying a Franchise?
Experience
Industry
Fees
Capital
Chance of Success
FDD - Franchise Disclosure Document
Territory
Training
Are you thinking of buying a franchise? Well, we don’t blame you! This is one of the most successful business models of the last century, with 785,000 franchise establishments operating around the US today.
One reason for this massive popularity is the array of incentives on offer for budding entrepreneurs. From leveraging the products and influence of established brands to accessing marketing and operational support, you can sidestep many of the usual problems start-ups face in the search for success.
Owning a franchise isn’t all hunky-dory though! What ordinary start-ups lack in experience, authority, and market share, they make up for in flexibility and control over their business. By contrast, franchisees operate under tight regulations dictated by the brand and pay for the privilege of using their brand name.
For these reasons, it’s important to learn more about the pros and cons of owning a franchise before signing any dotted lines. Do you want some help with that endeavor? Keep reading to discover 8 key things to think about before buying a franchise.
1. The Experience
Our first suggestion is to find out as much as you possibly can about the reality of owning a franchise. You could even go and work for one first! You’d learn what it’s like, how they operate, what challenges they face, and how much support they receive.
At the very least, you should research and talk with current franchise owners about their experience. Having this solid grounding in franchise ownership would help in two ways: first, you’d recognize whether or not it’s something you’d enjoy doing; second, you’d glean vital insights into the processes, pitfalls, and perks involved.</p>
2. The Industry
Think about your personal interests, skillsets, and experience levels too. A particular franchise might seem like an amazing business opportunity. But it could turn into a nightmare venture if you dislike the industry and/or have no experience in it.
Good things happen when passion and skillsets align. You’re onto a winner if you can find a franchise in a field you both like and have prior experience in. Take an honest look at your strengths and weakness to decide if the franchise in question ticks those boxes.
3. The Fees
A full understanding of your financial obligations as a franchisee is crucial as well. After all, the initial franchise fee will only be the beginning. You can expect to pay ongoing royalty fees too; some franchisees even have to pay out for marketing, training, and opening day giveaways.
Don’t be caught unawares! Investigate every single cost involved beforehand so you can decide whether or not it’d be a viable business opportunity.
4. The Capital Requirements
Those fees aren’t the only overheads you’ll have to cover as a franchisee though. Like any business, you’ll be buying inventory and paying utility bills, wages, start-up costs, and so on. That’s why it’s important to a) understand how much capital you’ll need in advance and b) have enough of it in the bank to mitigate the financial risks!
Likewise, regardless of the brand in question, it could take some time for your franchise business to be accepted in the community. Make sure you have a sizable financial buffer to weather this initial slow period until the franchise is fully up and running.
5. The Likelihood of Success
Starting a business on a whim rarely ends well. You need to assess the market, identify the demand (and competition), consider potential future obstacles, and, ultimately, determine the likelihood of running a profitable business. Alas, that last part’s often easier said than done for franchises.
Why? Because what works for one franchisee might not work for another!
Success depends on myriad factors, not least of which is an establishment’s location (and both the culture and demand therein). A franchisee’s personal connections make a difference too. Nevertheless, try to work out how many people have had success with a particular franchise, how they accomplished it, and how many failed to try.
6. The Franchise Disclosure Document (FDD)
The FDD is another pivotal piece of the puzzle. This document will tell you everything you need to know about the franchisor and its system- not to mention your potential requirements as the franchisee. Details about territory (more on this coming up), pricing guidelines, products, and various money matters are all included inside.
You must read the FDD cover to cover, understand the terms, and feel happy with the restrictions you’d have to operate under. Avoid signing up for anything that you either don’t understand or have significant reservations about.
7. The Territory
Start researching franchise ownership and it won’t be long before you come across talk of territory. Outlined in the FDD, your ‘territory’ is the area in which you can legally operate and serve customers. It’s imperative that you
define your territory clearly
choose properly based on size, population density, and setting and
avoid or plan for overlap with a competitor’s territory.
Likewise, how many territories, if any, does the franchisor expect to incorporate in the coming weeks, months, and years? How many are in place already? And what are their rules around competing when multiple franchisees operate in the same area?</p>
8. The Training
The best franchisors understand that their success is tied up with the success of their franchisees. As a result, they’ll invest in their learning and be proactive in their development from day one. It goes without saying that these are the organizations you want to buy into.
That’s why you should try to uncover the franchisor’s reputation (and the support they have on offer) before signing any franchise agreement. Inquire about any training opportunities that provide, hands-on assistance they deliver, and so on.
Remember These Factors When Buying a Franchise
Franchising is a hugely popular business model in the US and around the world. And for good reason! It offers a wide range of advantages to everybody involved, allowing entrepreneurs to ‘piggyback’ on the success of established brands.
But that doesn’t mean you should sign any old franchise agreement without thinking it through first! As we’ve seen, this is a big commitment that demands due diligence and insight to ensure you attain the success you deserve. Would you like professional support acquiring a franchise without the fuss of going it alone?
Featured
BizNexus -Learn More From Our YouTube Playlist:
BUSINESS ACQUISITION
Have you checked out our podcast?
THE BIZNEXUS ROUNDUP
Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.