Starting up a new business is always a risky proposition, but some of the risk can be mitigated by buying into a franchise. A franchisor is someone who has already taken the risk and put in the time and effort to build a wildly successful business, and is willing to let you capitalize off of that success — for a fee.
The main benefit of buying into a franchise is a ready-made game plan. You receive a name, logo, décor, products or menu, suppliers and promotional materials. Best of all, built-in customers that are already familiar with the business and ready to buy. There is little decision-making involved when it comes to setting up your business, and you can start raking in the profits much more quickly than you would when starting from scratch.
The down side is that you have little artistic freedom. Most franchises have a strict set of rules to be followed, governing everything from operating hours, employee uniforms and menu selections to product suppliers and contract service providers. You may be locked down to paying premium prices for these products and services rather than shopping around for a better deal. On top of that, there’s the initial franchise fee, plus regular royalties to be paid to the franchisor, which will certainly eat up some of your profit.
Are You Ready to be a Business Owner?
Although the risk is lower and the decisions fewer, owning a franchise is still tantamount to owning your own business. And while there are many rewards to being your own boss, there is also a lot of risk, hard work and responsibility involved. As a small business owner you have none of the security of being an employee; no steady paycheck, no guaranteed time off and benefits. You carry tremendous legal obligations and liabilities. As a business owner, setting your own hours may mean working many more hours than you did as an employee, especially in the early years of building the business. You need to be motivated, independent and ready to take on a lot of hard work, challenges and financial risk.
Do You Have the Financial Resources?
Depending on the franchise, the initial franchise fee can be anywhere from $20,000 to upwards of $100,000, and that’s just for the license. On top of that you’ll need start-up costs; everything from a lease, equipment and uniforms to security deposits and inventory. Your franchisor may be willing to finance the initial fee, and you may be able to get a small business loan to help with the start-up costs, but it’s important to do a realistic assessment of your net worth before you get started. Most franchises have a minimum net worth requirement – and you’ll need the information to apply for a small business loan. To determine your net worth, simply add up all of your assets and then subtract your liabilities. The remaining figure is your net worth.
Assets – Liabilities = Net Worth
Selecting a Franchise
You may already have a franchise in mind; perhaps that corner donut shop that always has a line down the street, or your favorite yoga studio or novelty store. It certainly helps if it’s a product or brand that you’re already familiar with and enthusiastic about but you need to make sure it will be as popular in the location that you’ve selected. The ice cream shop that’s wildly popular at the boardwalk in the summer time may not do as well in a less touristy location or a cooler climate. Remember, there are two factors to the success of a franchise; the product and the location.
Do Careful Research
No matter what franchise opportunity you plan on pursuing, it’s important to do careful research before shelling out your hard-earned money. Don’t fall for the glossy brochure, charts, and financial statements provided by the franchisor; figures can be manipulated in any number of ways. Your best bet is to talk with other franchisees. They’ll not only give you first-hand information on what kind of experience they’ve had, but can also help you avoid unforeseen pitfalls that they may have encountered.
Peruse (in case you didn’t know, means read carefully!) the franchise rules to find out how much creative control the franchisor will retain over your operation, and decide whether or not you can live with that amount of governance. Starting a franchise, you’re expecting to be in business for many years to come, so if you have particular ambitions and creative ideas you’re longing to explore, a franchise may not be for you.
Get Expert Legal Advice
This is not a decision to make without sound legal advice. Don’t sign any agreements without having them looked over by an attorney with franchise experience. Find out what your rights are with regard to contract terms and renewals. More than a few unlucky franchisees have put years of effort into building up their business only to have the franchisor decide not to renew their agreement in favor of a competing location, leaving them high and dry with a non-compete clause.
Operating a franchise can be a fast-track to independence and small business ownership. It can be exciting, rewarding, and highly profitable. It can also be terrifying, frustrating, and disappointing for those who are not up to the challenge, or who fail to put enough time and effort into selecting the best opportunity. Like everything else, you get out of it what you put into it.