Here are some things to consider before deciding whether a franchise model is right for you:
1. Understand Capital Requirements and Financing Options
Each franchisor usually has unique terms in their franchise agreement. Some may charge a one-time fee for the right to conduct business under their brand name, and there may be other miscellaneous costs for items you need to conduct business, such as a company vehicle or employee uniforms. Under federal law, there are three specific things that must be outlined in a franchise agreement: the franchise fee, trademark/trade name permissions, and a marketing system or method on how to operate the business. It is critical that you understand the franchisor’s terms before agreeing to anything. They should be there to guide you towards success and available to answer any questions you may have along the way.
Unless you are able to pay for a franchise in full with your own savings, you will need to find a way to finance the cost. Many franchisors offer their own financing solutions, whether it be by offering loans directly to franchisees, or helping them secure financing through specific partner lenders. Another option is to take out a business loan or SBA loan from a traditional bank. Checking your personal credit score before starting the loan application process can alert you to any potential problems that could prevent you from securing funding. Banks typically have a minimum credit score requirement and other criteria that business borrowers must meet. If you think your credit might be a problem, take the time to clean it up or consider an alternative funding option.
2. Complete a Cost Benefit Analysis
Sometimes simple is best when it comes to making a big decision. Putting together a cost benefit analysis, which is really just an in-depth list of pros and cons, can be a helpful way to evaluate all of the potential benefits and drawbacks involved with a franchise opportunity. Some potential benefits may include strong brand name recognition, built-in training resources, and a proven, established market for the product or service. Costs may include your franchise fee, build-out costs, royalty fees, inventory costs and more.
You should then take a look at any funds you’ll be contributing on your own, determine how much additional financing you will need to get off the ground, and estimate how much revenue you expect to bring in. This analysis should help give you a better understanding of whether a franchise could be a good fit for you.
3. How Much Support Can You Expect?
One of the biggest benefits of buying a franchise is that the franchisor typically provides extensive training. However, you shouldn’t assume this to be the case and should double-check with the franchise you’re interested in. Training in both the industry and the operations of your new franchise are essential to your success.
It’s also important to understand how much support you will receive from the franchisor after your initial training. As a new franchisee, you should have the reassurance of knowing who you can call for support when you’re struggling or have additional questions.
You should also find out if the franchisor will give you access to ready-made marketing materials, and get a sense of how extensive any of the franchise’s national or regional marketing campaigns are.
4. Consider Talking to Other Franchise Owners
Some franchisors recommend that potential franchisees work in one of the franchises they might want to purchase before they actually do so. Although this isn’t possible for many, just setting up a call or meeting with one or more franchise owners could be beneficial. Hearing their perspective can give you a better sense of what to expect with your own franchise, and could spark additional ideas for further research. Meeting with existing franchise owners can also be an excellent way to help determine if the company culture is a good fit for your skills and personality.
5. Be Sure You Understand the Franchise Disclosure Document
Once you have made a decision about moving forward with the purchase of a franchise, be sure to read all the Franchise Disclosure Document (FDD) carefully. This is a legal document that describes in detail how the business relationship will operate between the franchisor and franchisee. If you have questions about any part of it, do not hesitate to ask for clarification or more information. Like any legal documents in life, you do not want to fall victim to something because you did not fully understand it when you agreed. Take your time reading through it, as oftentimes the Franchise Disclosure Document can be 50+ pages, with hundreds of sections.
The Federal Trade Commission (FTC), offers an online guide to help you understand exactly what you are agreeing to before you sign a Franchise Disclosure Document. It’s also helpful to do some research on the following before you sign:
• Expenses you may not have considered
• Franchisor bankruptcy filings
• Litigation against the company or its executives
• Level of training the franchisor agrees to provide franchisees
A franchise can be an exciting business opportunity for many entrepreneurs, but the decision to purchase one should involve careful consideration and research. If you are interested in potentially purchasing a franchise or would like to discuss other business financing needs , don’t hesitate to schedule a meeting with our dedicated Business Banking Team today.