If you’ve always dreamed of owning a business but find the task of establishing one from the ground up too daunting, consider acquiring a franchise. The franchising model enables you distribute products and services of a recognizable brand. Plus, you get all kinds of support from the franchisor (the organization that grants you the right to sell their offerings). Essentially, the franchisee (you) will borrow a proven business model of an established company, which makes acquiring and running a franchiser a much safer bet than launching a brand new company.
Currently, franchises comprise of 3 percent of the overall US GDP. If you feel franchising is the right business model for your entrepreneurial career, you’ll want to make the following considerations.
1. Does the franchisor have a good track record?
Many companies list franchising opportunities, but that doesn’t mean they’re all worth the attention. You should first research to find businesses who’ve proven themselves as successful for budding franchisees. Also, it’s smart to speak with existing franchisees of that company. Talk to them about their experience, the support they’ve received since they acquired the franchise, and the growth they’ve had since they created an establishment. This will give you a clear idea of whether buying a franchise from a certain company is worth the investment.
2. Is it necessary to contact an attorney?
New franchisees often underestimate the legalities involved in acquiring a franchisee. One of the main obstacles is communicating with the franchiser and drafting the terms and conditions. While you may not have much influence when it comes to changing the contract’s terms, it’s crucial that you’re aware of what you’re getting yourself into as you put pen to paper. Additionally, you may want to recruit a lawyer for reviewing the ‘franchisor disclosure document’ – it is basically the franchise’s disclosure, and is similar in nature to a disclosure document that an organization provides to potential investors. It’ll contain the franchise’s history, trademark regulations, provisions for conflict, and other vital information that franchisees should read with a vigilant eye.
3. Can the raw materials be purchased from an external supplier?
For maintaining consistent quality, many franchisors insist that the person acquiring the franchise purchases the raw material from them directly or source it from one of their special suppliers. The ‘special’ supplier will give them rebates when the franchisee orders the suppliers. In most instances, the prices you end up paying will be higher than if you sourced these materials from outside. See if the contract allows you to go elsewhere for buying raw materials. If it doesn’t, you may risk losing whatever you’ve invested as the franchisor probably has the right to terminate the contract in case external sourcing is listed as a violation.
4. Would it be easy to conduct due diligence?
A vital aspect of the due diligence involved in this type of business is analyzing the litigation history of the franchisor. The FDD (franchise disclosure document) has an item that discloses the details pertaining to legal repercussions regarding the franchisors and their proceedings. Several claims can be raised if the franchisor has constantly failed to adhere to the terms of the contract in the past. Also, franchisees should inquire how the franchisor manages the disputes, as well as the reasons that could lead to the termination of the agreement.
5. Would it be necessary to take a loan?
As in the case of most businesses, there are startup costs involved in starting a franchise. While some franchisees would be in a prime position to finance their own franchise, most will need to tap into an external channel for funding. Investors are unlikely to lend money to franchisees, but they still have various sources available for funding their dreams. For example, they could ask their relatives and peers to lend them a gracious amount. Credit cards and relaxed, personal loans are also worthwhile to consider if you have a good credit history; however, the failure of the franchise would mean you’d have to part ways with your personal assets. Perhaps a better alternative would be to look for small business grants and relevant loans.
6. Is the franchise tied to a specific location?
If we talk about promotion, it can be challenging to overcome local competition. For example, if you want to acquire the franchise of an Atlanta-based bakery, you’ll be competing with several other bakeries in that region/city/neighborhood. However, some franchise businesses are open to lending themselves to mobility. And those are the type of companies you may be interested in (not being restricted to a locality enables franchisees to move where the customer it). Examples of such companies include food delivery services and ice cream trucks. One recommendation for marketing the franchise of such a company is to create a social media page and announce where the business will be on a specific day.
7 .Does the franchisor offer any training?
Many companies that offer franchises will provide the initial training for getting the franchisee up and running, but it’s important that you discover the kind of ongoing support you’ll receive once the training ends, and see how it compares to the support provided to other franchisees. What type of guidance is provided on a daily basis? Is an option for on-site training available? Make sure you’re equipped with the right knowledge about ongoing support before making a decision to acquire a franchise. If this is your first business, initial training is utmost crucial.
Bottom line
No two franchises will be alike, so it’s critical to make the considerations listed to know exactly what you’ll get for your money. A thorough review should give you a good idea of most aspects of the franchise model and the problems associated with it. Being organized at the start would enable you to set up a thriving company that has the backing of a known brand, which is an excellent way to own a source of recurring income.