Starting a business is always a daunting endeavour, even today when businesses are opening up left and right. You don’t know if your business idea will catch on and if your investment will pay off in a timely manner – there are just so many things that could go wrong and slow down or entirely cut your business’s development, leaving you with more problems than you started off with. However, what if we said that there is a faster and safer way to get into entrepreneurship? Sure, it still requires making an investment and working hard to make it, but some of the risks are mitigated and the start is made easier.
Franchising can be a great option for you if you lack a solid business idea but still want to make a living out of your outstanding business skills. This model involves buying into an already developed business with an established brand name and a well-working system. The franchisor provides you with everything you need to get started with the business: education, training, support, and a slew of other things. Still, this does not mean that franchising is easy and you cannot go wrong with it. The most crucial thing is that you thoroughly consider whether franchising is for you and do as much research about potential franchisors as possible. Here are the most important things that you need to consider before buying a franchise.
Is franchising for you?
As mentioned in the beginning, franchising can be a good alternative to starting your own business from scratch. However, it is not for everyone. Before you go ahead and sign the papers, consider whether this model suits your needs and preferences. As a franchisee, you will always be under the control of your franchisor to a degree. This means that you might not be able to execute your ideas, which can leave a lot of ambitious entrepreneurs dissatisfied. If you aren’t ready to give up a part of your freedom, franchising might not be for you. On the other hand, as the franchisor will equip you with an already tried and tested business plan, a lot of people find comfort in the fact that the risks of making bad business decisions are mitigated. So, if you’re anxious about doing everything on your own, the support system of a good franchise might just be what you’re looking for.
Think about the finances
The second thing to think about before deciding on joining a franchise is finances. By this, we mean the costs of acquiring the franchise and keeping it operational, as well as the financial projection for the future. When purchasing a franchise, you will be required to pay an initial fee that can range from $10,000 to as much as $100,000. But that’s not the only expense to expect. Well-established brands will have you pay ongoing royalty fees, and depending on the franchise agreement, you might have to pay for marketing, advertising, inventory, and so on. This means that you need a sizeable capital and you have to be able to qualify for a loan. The size of the loan banks is going to give you might depend on the franchise you intend to buy. In any case, you need to stay realistic when it comes to your buying power. If the franchise you have your eyes on is disproportionately expensive compared to your savings, move on. But besides your own finances, you also need to consider the franchise’s finances. Obviously, you want your investment to be profitable. So, do some research on the franchise and do the math. Does it look like the company is growing in a steady manner? You absolutely cannot skip this step.
Your goals and preferences
Doing what you love is what truly makes you work with passion and strive for improvement. This is also a factor to consider when buying a franchise. Sure, you might simply enjoy entrepreneurship, but there is a world of difference between operating a fast-food restaurant and a retail store. So, while it might not be your number one priority, it is still quite important to pick an industry that you are genuinely interested in. While you will obviously not be doing all of the work yourself, it is still a big advantage to be compatible with the franchise in question. You will need to put in a lot of work, and interest will give you the motivation to do so. This is also a good way to learn the ins and outs of the industry in case you plan on starting your own business sometime in the future.
Consider the local market
Location is always a crucial factor in the business world. So, the next thing to consider when you’re thinking about buying a franchise is the location and the local market. Regardless of the brand’s status and your preferences, if there is no room in your local market for this particular franchise, you are setting yourself up for failure. Do thorough market research and assess the local demand for the products or services the franchise provides. Look up how much competition you can expect in the area. Sometimes, franchisors do this part of the research themselves, too, but mistakes can happen so you shouldn’t trust anyone blindly. Other times, you yourself have to find the right spot for the business. Of course, a little bit of risk always remains since you cannot be sure that your competition won’t open shop across the street later on.
The amount of support provided
As we already mentioned, a great benefit of buying a franchise as opposed to starting it all from scratch is that you will have your franchisor behind you, providing you with support. Therefore, franchising is a great option for those who are not as experienced but eager to learn, as this model provides them with the ideal environment to do so. Now, the amount of support a franchisor offers varies greatly between franchises. This is why it’s important to do your research on this front as well before making your decision. During your interview with the franchisor, ask them about the specifics when it comes to supporting. Based on what they say, it will be easier for you to determine what you can expect once you start this endeavour.
The background of the franchise
As we have mentioned several times already, you will be doing a lot of research before purchasing your franchise. An internet search on the franchise is a good way to start, but it still might not give you the full picture. The single best way to get first-hand information about the conditions at a franchise would be talking to fellow franchisees. They will give you the information that is not in the FDD. One of the crucial things that you might want to look into, as well as ask about when meeting fellow franchisees, is the background of the franchise. This includes everything from the basics all the way to how they handle potential conflicts. A company’s litigation history is a vital piece of information you simply need to study thoroughly before signing a contract with them. Needless to say, many such cases definitely mean a red flag – however, you need to consider the size of the company here, too.
Inquire about the protected territory
The next critical thing to consider before becoming a franchisee is the franchisee’s protected territory. Protected territory in this context refers to the area within which no other franchisee from the same franchise is going to set up shop, “stealing” your potential customers. Theoretically, the FDD should include this piece of information, however, it might not be defined clearly enough. In some cases, the franchisor does not offer such an agreement at all. Beginners tend to make the mistake of disregarding this detail, however, you should not make any rash decisions. Above all, make sure that you are familiar with the specific terminology used in the franchise world. For instance, “exclusive territory” and “protected territory” have their differences. It is also a mistake to solely focus on the size of the territory, which in itself, without the necessary context, does not give enough information. A protected territory can easily become half its size, for instance, if another franchise opens right by its border.
What about the future?
Finally, it is not enough to look at the immediate conditions the franchisor offers, but you should think about the future as well. First of all, think about what your goal is with this endeavour. Is it to gain experience for your future projects, possibly your own business at some point in the future? Or is franchising your long-term employment plan? Do you want to expand this business in the future? All of these have the potential to work but only if your plans align with the terms of your contract. For instance, an important piece of information to look out for in the FDD is any restraint of trade clauses that might prevent you from doing similar business for some time after the termination of your contract. Another key part is the one concerning renewal rights. You might intend to do this work for the foreseeable future, but it will not be up to you to decide in case the document does not present you with perpetual renewal rights. Not being able to renew your contract once it expires might mean that your investment does not pay you back to its full potential due to the lack of time.
As you can see, while franchising might seem easy, there are a lot of considerations to make before you can confidently purchase your franchise and rest assured that you will be able to reap the fruit of your labour in due time. However, if you do your research and believe that this is the right business model for you, it can be a truly lucrative endeavour.