Buying A Franchise: Should You
Or Shouldn’t You?
If you’ve always thought
you’d like to be in business for yourself — but not by yourself —
purchasing a franchise might be just the ticket. Not only do you start with an
established product or service that has already sold successfully, but owning a
franchise is almost like having a mentor: valuable training and the support
needed to help you succeed come as part of the package. However, while it may be
true that far fewer franchises close up shop within the first five years of
opening (8 percent versus 77 percent of independent businesses) you should be
aware that there are still risks associated with owning a franchise.
Getting Started
Financing often looms as the
biggest stumbling block to buying a franchise. However, there are several
options. It is possible to receive assistance in financing a new franchise
through the franchiser. If the franchise doesn’t offer direct financing and
you’ve never owned a business, you’ll need to prepare a financial package to
submit to a bank or other financial lenders. The package should include personal
income-tax returns for the last three years, a personal history, a projected
profit-and-loss statement for your first year in business, and a list of
personal assets and liabilities. The better prepared this package is, the better
a lender’s first impression of you will be.
Shop
Around
With lots of small companies
now franchising, hoping to increase their sales and expand their market reach,
and with new franchise categories popping up seemingly, it’s even more
important that you choose the right business opportunity. Before you invest, be
absolutely certain that the organization is capable of delivering the support
that will ensure profitability for your franchise. If you are serious about
investing in a franchise, shop around and compare the merits of one franchise
against another. Make sure the officers and directors of the company demonstrate
a high degree of business and franchising experience, along with sales
professionalism. Check that the franchiser is either totally centralized or
structured so as to be able to provide local support. And take note of how
closely the franchiser questions your qualifications and suitability – a high
degree of selectivity means a stronger, more profitable system.
One final word of caution: if
the franchiser either discourages you from meeting with existing franchise
owners or tries to dissuade you from showing the agreement to an attorney prior
to execution run!
Make Sure You’re Well Supported
Besides the research you do on
the company itself, thoroughly investigate how well you will be trained. A
company’s commitment to frequent training is a sign of its commitment to
helping your business grow. Ongoing training and updated programs should be
available to you at no charge for the length of your contract. Part of buying
into a franchise system is having regularly scheduled training classes that the
franchise owner and staff can attend, held in close proximity to their business.
Also, make sure that the franchiser provides a system of localized ongoing
business consultations for franchisees. Consultation, both hands-on and by
telephone, should be part of the support system to help you eliminate problems
before they develop and resolve existing problems before they become
unmanageable.
Although the franchise
documents should clearly outline all these factors, a good way to determine what
life will be like as a franchisee is to contact the company’s existing
franchisees. Ask them what kind of experience it has been for them, what kind of
problems they’ve had, and what kind of return you can expect on your
investment. And don’t just talk to a few people; call as many as you can.
Know What You’re Agreeing To Financially
The cost of owning a franchise
can vary from several thousand to several hundred thousand dollars, depending on
company size and the geographical area of the franchise. Before you sign on the
dotted line, make sure you completely understand what’s expected of you
financially. For example, you’ll have to pay a franchise fee, which covers the
business concept, rights to use trademarks, management assistance and other
services from the franchiser. This fee may not include the cost of the property,
nor may it pay for advertising. Be equally as clear on what your ongoing
financial responsibilities will be. For example, you often must pay royalties to
the franchise even if your outlet has not earned significant income during that
time. And even if the franchiser fails to provide promised support services, you
still may have to pay royalties for the duration of your franchise agreement.
Check With The Experts
Under FTC rules, franchises
must disclose information to prospective investors to help them make an informed
final decision. This includes financial statements, the names and brief
biographies of company officers, information on the company’s finances, and
the names of other franchisees. Be sure to have the franchise’s financial
statements reviewed by a professional(s).
Be Realistic
If you go into franchising
with unrealistic expectations of quick profit, most likely you will fail. Buying
a franchise is not an automatic guarantee of survival. In fact, you may not be
able to get much money out of the business in the first few years. Be patient.
Continually look for ways to attract new business. Don’t be afraid to test new
strategies and ideas.