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What to Consider Before Jumping into a Franchise Business

Getting started with a franchise business may seem on the surface like an attractive, more secure option for would-be small business owners.

But what many newbie franchisees don’t fully realize is that starting a franchise business still involves a considerable investment of time, energy, and money, and there are numerous fly-by-night operations that promise the world, but in the end fail to deliver. Here are several points to consider before taking the franchising plunge.

The Stats: Franchise Growth Brings Opportunities… and Challenges

In the midst of all the not-always-so-cheery economic reports that the media has been feeding us, the franchise industry seems to be a beacon of positive activity. Franchises make up more than 10 percent of U.S. businesses with paid employees across 295 industries, and while the number of franchise establishments has yet to reach its pre-recession levels, the 2012 employment within existing franchise establishments has surpassed the 2008 level of eight million jobs. According to the Internation Franchise Association (IFA), more than 10,000 new franchise establishments were opened in 2012, and overall the franchise industry saw 1.5 percent growth.In total, franchise sales have grown by 13.9 percent over the past five years.

With thousands of franchise organizations operating in dozens of industries, there is no shortage of options for anyone interested in buying a franchise. But at the same time, the numerous choices can make that decision a challenge for even the most determined would-be franchisee, and it’s made further complicated by the fact that the field is ripe with bad business models and outright scams that can easily trip up the uninitiated. The supposed security and reduced risk of running a franchise versus an independent business has also come under attack. According to a recent report by the SBA, the failure rates between the two forms of business are actually equal.

The Franchises Worth Buying are Those With a Proven Reputation of Profitability and Support

Given all this, if you are considering starting a small business franchsise make sure you exercise your full due diligence before entering into a contract with any franchise operation and learn how to pick the good franchise opportunities from the bad ones. Here is a quick checklist of what to consider before entering a contract with a franchisor:

Is the Franchise Disclosure Document (FDD) clear, thorough, and accurate? The FDD is one of the most important documents a prospective franchisee will have. By law, all franchise and business opportunity sellers must provide to prospective purchasers with a Franchise Disclosure Document (FDD).

The franchisor must provide specific information about its operations to help the would-be franchisee decide whether or not to work with the company. This information should include, the obligations of the franchisor, actual, average, projected or forecasted franchise sales, profits or earnings, and recent financial statements. Since first time franchisees may not know what to look for in such a document, it is advisable to hire a qualified franchise attorney.

Does the prospective franchisor have a good background and reputation? Has the franchise operated successfully within several different locations for at least 3-5 years? Is there a solid business model that is both doable and potentially profitable?

Look for franchise opportunities that offer strong franchisee support. While this “support” can take on many forms- from educational workshops to access to analytical tools to the existence and support of numerous channels of communication and transparency- it all boils down to a commitment to help their franchisees succeed.

What does the management look like? Does the management team behind the franchise have the experience and know how to run a successful franchise operation?

What is the industry like? Is there growth potential within the industry being considered? What are the current economic trends, and, where applicable, what is the profile of the local market?

Are you interested and/or experienced with the particular industry? Do you have the necessary skills and background to be successful in this kind of business?

What are the start-up and operational costs associated with this franchise? What kind of area, if any, will need to be leased to operate the business? What about equipment, employees, and supplies?Do you have the financial means to buy into the franchise, expand, or renovate?

What is the expected investment of time per week, and what is the projected level of income? This is an extremely important factor to consider when looking into a franchise. Even a franchise operation that offers a well-known brand name and a comprehensive support system, will still require a lot of effort on the owner’s part to open and operate, and a considerable amount of time may pass before the owner breaks even on the investment. This holds even more true for a lesser known brand, with weaker support.

In short, the bottom line for any prospective franchisee is to exercise full due diligence so that precious time, energy, and money are invested in something that will provide an adequate return.

Buying a Franchise is a Big Investment of Time and Money

That said, opening a franchise can be a great opportunity for those looking to start their own business, but it can also come with a hefty price tag. What does it take to open your own franchise concept? Here’s a brief rundown of the major costs involved in becoming a new franchisee.

The franchise fee. All franchise companies will charge an upfront franchise fee. This sum is supposed to cover things like training, support, and the ability to use the franchise name/brand. The amount of this fee varies considerably depending on the size, nature, and scope of the franchise business. These fees will typically start at less than $10,000, an amount common among mobile and home-based business franchises, and can exceed $100,000. The average franchise fee is about $30,000, and each franchisor has its own set of financial requirements that the franchisee will need to fulfill.

Professional fees. Opening a new franchise business may require the assistance and expertise of several professionals, such a qualified lawyer and accountant.

Real estate, renovations, furnishings. Depending on the nature of the franchise business, there may be several costs associated with the location such as rent, equipment, furniture, fixtures, design, signage, and landscaping.

Inventory and supplies. To get the business up and running, there will need to be an initial stock of inventory and supplies.

Miscellaneous operational costs. These include a whole bunch of additional expenses needed to get the business up and running, such as enough working capital to cover expenses till revenue comes in, advertising expenses, employee training and payroll.

What is the expected investment of time per week, and what is the projected level of income? This is an extremely important factor to consider when looking into a franchise. Even a franchise operation that offers a well-known brand name and a comprehensive support system, will still require a lot of effort on the owner’s part to open and operate, and a considerable amount of time may pass before the owner breaks even on the investment. This holds even more true for a lesser known brand, with weaker support.

Resources to Help Find a Franchise

The IFA provides a free online directory of more than 1,200 opportunities searchable by category, franchise name, amount of start-up capital required, availability of financing and other important criteria.

World Franchising Network also has an online directory of franchises published by Source Book Publications of Oakland, Calif., that can be searched by company name, industry, average total investment, average royalty fee and other criteria. The company’s books include directories of new franchises, international franchises and franchises friendly to minority businesspeople.

Comments

  1. Adam Gottlieb says

    Hey, it’s the Franchise King himself :)

    Hi Joel,

    Thank you for catching that; I’ve just updated the post with the correct information.

    And you should have mentioned that you have a really great resource for franchisees: http://www.thefranchiseking.com/

    It includes current news and insight on the franchising industry, a free franchising quiz (to see if franchising is right for you), and a searchable franchise directory.

  2. says

    Adam,

    You wrote that “The amount of this fee varies considerably depending on the size, nature, and scope of the franchise business. On the costly end, are lodging franchises ($4-$6 million), followed by full-service restaurants ($700,000 to $3.5 million), and fast food concepts ($250,000 to $1 million)”

    I need to point out that you stated the total up-front investment-not the franchise fee.

    Franchisee fees average around $30,000. The franchise fee is a licensing fee. It’s the buy-in.

    Thanks for the information contained in your post.

    The Franchise King®

  3. says

    Awesome, Adam!

    I wasn’t slamming you-I just wanted to make sure that a would-be franchise owner knows how much franchise fees can be.

    We don’t want to freak them out!

    And, thanks for the mention.

    Love your site

    JL

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