5 Things to do Before Buying into a Franchise
For budding entrepreneurs who want to start a business, acquiring a franchise often has lower risk than starting a company from scratch, as franchises have the benefits of a stress-tested business model with ongoing training and support. However, a franchise is not a passive investment and there are no guarantees that signing up for a franchise will let you achieve overnight success. Instead, you need to do your due diligence and prepare yourself for challenges to increase your chances of success.
Here are the five things to consider to help your entrepreneurial venture start off on the right foot:
Analyze market demand
The first step in deciding whether to dive into a franchise opportunity is to gauge if there’s a healthy market for your product or service. Performing market research will help you choose a perfect location for your new franchise and provide insight into your local competition, consumer behaviors, and industry trends. Consider looking for businesses that offer multiple types of products or services with steady and recurring cash flow. It’s also a good idea to visit local franchises near you and observe the operation as a customer.
Estimate the initial investment
The next thing you should consider is how much you need to open your first franchise. The initial cost varies considerably, depending on the industry and the size of the franchise. This usually covers the initial franchise fee, costs associated with equipment, training, payroll, construction, and rent for initial operations. In addition to that, franchisees need to pay ongoing royalties and marketing costs to the franchisor. Once you receive the franchise disclosure document (FDD) from your franchisor, make sure to review item 5 and 6 carefully to understand the fees associated with the franchise.
Examine your earning potential
Total revenue is the most critical determinant of the long-term cash flow of your business. You can consider hiring an experienced accountant or financial advisor to help project the return on investment. Item 19 of the FDD showing the Financial Performance Representation (FPR) will be helpful for you to understand the business performance of the existing franchise locations.
Understand the level of support you’ll get
While the level of support can vary greatly from brand to brand, there are four main categories that you should expect from a typical franchisor: location selection, initial training, marketing, and continuing education. Furthermore, unless you plan to use your own money to start a business, you will likely need to approach your bank for a loan. A reputable franchisor can also help you prepare a financing proposal to increase your chances of getting approved.
Resolve franchising disputes
There are some common issues that can cause disagreements and disputes between a franchisor and franchisee. These can range from the franchisor not providing adequate support to their franchisees to a communication breakdown or potential breaches of the code. You should know whether the agreement gives you the right to litigate or seek private arbitration or mediation and, most importantly, who will be responsible for the attorney fees.