By Eric Bell
Investing in a franchise requires extensive due diligence. Not only do investors need to understand the initial costs and what financing options are available, but they also need to carefully research the franchise model, the franchisor’s experience, the franchisor’s approach to running the business, and the culture of the franchise.
Just as important as researching the franchisor, future franchise owners need to assess their personal strengths, weaknesses, and work/life balance aspirations to make sure the franchise system they choose matches their personality and long-term goals. The extra time put in during the due diligence phase will pay off in the end.
Here are five questions to consider that can help you make the right franchise investment decision:
1. How much will it cost?
The costs associated with buying a franchise vary widely, depending on the industry you choose and the brand within that industry. There are many low-cost franchises that start around $10,000, but the majority of franchises require investments of $50,000 to $200,000 to get started. There are also many with startup costs that are far beyond this range, especially those of well-known brands including fast-food chains and retail stores.
Understanding how much your initial investment will be and the associated fees will help you to narrow down the industries and brands you are considering. For example, the cost of entry for a brick-and-mortar retail store or fast-food chain is going to be significantly higher than the cost of entry for a home-based business.
Almost all franchisors require their franchisees to pay a one-time upfront fee know as the franchise fee. Ultimately, you are buying the right to use the franchisor’s brand and business model, while also receiving ongoing support in management, training, marketing, and more. In addition, with most franchises, there will be ongoing royalty fees, which usually are a percentage of revenue, to pay after the franchise is open.
Some franchisors offer incentives for women, veterans, and minorities. When you research the initial investment requirements, ask if there are franchise fee discounts. These types of incentives could make the difference in whether or not you can afford that franchise.
The franchise fee and startup investment cover the costs to open the doors of your business. Also remember to budget at least six months of operating capital while your business ramps up.
2. What are my financing options?
Most franchise investors bankroll their franchise through some form of self-financing. This could be a home equity loan, a second mortgage, using money from savings, or even withdrawing funds from a retirement account. Here’s a quick overview of some of the options:
- Rollover for Business Startups (ROBS)—ROBS allows you to use money in your retirement accounts (401(k), traditional IRA, or another eligible retirement account) to invest in a franchise.
- Small Business Administration Loans (SBA)—SBA loans are government-guaranteed loans. They are a great financing choice because they offer long repayment terms and low interest rates.
- Financing through the franchisor—Many franchisors have relationships with lenders that you can leverage. Preferred lenders have an understanding of the franchise’s business model, and may be more likely to offer financing.
- Home equity loan or line of credit/second mortgage—This is an option for homeowners who have equity in their home. You can borrow against the equity to help finance your franchise.
- Family and friends—If you have family members or friends who are willing to invest in your franchise, this could be a fast (and low-interest) way to raise necessary capital.
It’s important that you evaluate the many financing options available before you make a financing decision. The good news is obtaining financing as a franchisee is often easier than as a new, independent business owner.
3. How happy are the current franchisees?
During the exploration phase, it is critically important to meet with and interview existing franchise owners. Current franchisees will help you understand exactly what the day-to-day looks like, what their major challenges have been, and whether their relationship with the franchisor has been up to par. They can also help you understand what costs, if any, have unexpectedly arisen.
Speak with as many franchisees as possible. They may be busy, but they will want to give you their time as they understand the importance of growing the brand they have personally invested in. The information gleaned from these interviews can be invaluable. Some questions you should consider asking are:
- What has been the most rewarding part of being a franchisee?
- What has been the most unexpected struggle?
- How many hours a week do you work? Is that more, less, or about the same as you expected?
- What is a typical work day really like?
- Are you happy with the financial returns to date? Do you feel you are on your way to meeting all of your financial goals?
- What was the franchisor’s role in helping you open your doors?
- Is the franchisor accessible when you need them to be?
- Has the ongoing training and support from the franchisor been adequate?
- Would you invest in this franchise opportunity again if you had to do it all over?
4. What type of support and training does the franchisor offer?
Franchise ownership requires you to not only invest your money but also your time. The initial phases of getting a franchise business up and running can be challenging, and over time you will require guidance and support. You want to make sure you are joining a company managed by experienced professionals, who have created a proven model that will grow with your business.
Franchisors should provide training programs that cover all aspects of owning and operating a successful business, from initial and ongoing training and assistance to marketing and advertising support. Most franchise systems also provide local support through franchise field representatives.
Proper training and support is not only essential in helping franchisees achieve the success they signed up for, but it is also crucial to building a franchise system that is consistent from one location to another. Without that consistency, the brand is not likely to grow to the levels everyone is working towards.
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5. Is the franchise a good fit for me?
Do your core values, abilities, and goals align with those of the franchise system? As a franchisee, you will be signing a long-term contract and be required to run your business as dictated by a prescribed set of guidelines. Franchisors can be very diligent about enforcing policies and procedures to maintain uniformity and ensure future success within a franchise system.
Here is what to consider when evaluating if a particular franchise is a good fit for you:
- What are your personal goals for making this investment?
- Does this franchise represent a particular field that you’re interested in pursuing?
- How many hours are you willing to work?
- Are you an independent thinker and worker, or do you work better when given some parameters?
- Would you be happy operating the business for the next 20 years?
- What specialized skills or talents will you bring to the business?
- Does the franchise require technical experience or relevant knowledge?
Making the final decision
Buying a franchise is a big commitment that requires hard work and dedication. The most successful franchise owners are those who truly enjoy their business and putting in the time necessary to make it a success.
If you like the idea of being self-employed, and operating an established business, then a franchise may be the right opportunity for you.
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