Buying a franchise can be rewarding or leave you bankrupt, depending on the popularity of the franchise, the market, demand, expenses, your ability to operate the business, and a list of other factors. A mistake several would-be franchisees make is thinking that buying a big-name franchise automatically equals success—this is often not the case. If you are in the market for a franchise and you hope to be successful in this venture, there are things you should know about the whole process. You can then decide if it's right for you.
Buying a successful franchise rest largely on understanding the franchise business model, so when looking for lucrative franchising opportunities you know what questions to ask, what to look for, and the difference between a deal that sounds beneficial and one that is.
Understanding the Franchise Business Model
In simple terms, the franchisor (the company) allows you to do business using their name. You pay an initial franchise fee and continuing royalties either weekly or monthly throughout your franchise agreement. You will also be required to design your store to conform to their standards. This is usually the length and breadth of the knowledge of many would-be franchisees, but the franchise business model involves more contractual obligations, stipulations, and franchisor controls. These controls are listed in the Federal trade commission's guide to franchising.
Franchisor-controls may restrict your ability to exercise creative control. For example, a franchisor retains the right to ask that you operate in a particular way, or that your employees work for a specified number of hours. They may also restrict your ability to offer some services or may require you to make regular renovations. They also require you contribute to a marketing fund or not spend below a certain amount on advertising every month. These stipulations increase operational costs and you are expected to fulfill them whether or not you make enough profits.
All this is not to discourage you but to show you the reality of the franchisor-franchisee relationship—it's not all rainbows and money. If you decide that a franchise is still right for you, then this is what you need to do to obtain one.
Fees and Costs
It's easy to focus on the initial fee, marketing obligations, and royalties and forget about the cost of operating at the required standard. It usually takes months for new franchisees to become profitable, and, in the interim, you'll need to cover operational costs, employee salaries, cost of raw materials, and other costs. These other costs are not necessarily a part of the franchisor fees, but you should consider them early on.
You need to understand franchise contracts so you'll know what to look for. Some franchisors (like McDonald's) require you make a downpayment with personal or non-borrowed funds. Some require that financing should not exceed a certain number of years. Some require that you submit your proposed site for approval.
Franchisors usually have one stipulation or the other, and it's all in the franchise agreement. Not all stipulations may directly involve money, but some may affect the initial or operational cost and should be taken into consideration.
When reviewing a franchise agreement, look out for their termination and renewal policies, their contractual obligations and controls, itemization of expenses, ability to transfer or sell, and the turnover of other franchisees. If legal documents bore you, then you should hire a franchise lawyer to vet them. Be sure to call out any discrepancies you may notice.
Many franchisors provide financing options for their franchisees, but not all. You may need to seek other options, some of which are SBA loans, bank loans, alternative lenders, or even crowdfunding.
For SBA and bank loans, you'll need to show that you can manage funds by having a good financial track record. Banks check your records to see how much you earn and whether or not you can live within your means. Your credit score also carries some weight here—a bad credit score tells then you're more of a liability.
Before choosing a location, be sure to check if you'll need to get it approved by your franchisor. Some franchisors provide location options, while some give you the freedom to choose. You can buy an existing building, lease one, or build from scratch (this is usually the least likely option).
If you are leasing an already existing building, be sure to have it inspected by a professional. Be sure to check the plumbing, gas lines, electricity, etc. If it is a steel building you should check for any damage from excessive moisture. Even after inspection, you should take steps against it. You can look online for tips to prevent condensation in a steel building.
Once your location has been taken care of, you'll still need to consider marketing and customer service, but, by this time, your purchase of the franchise should be complete.