Three friends of mine were looking at buying a sandwich franchise together. They interviewed the owner several times and pored over his accounting books to determine if this is going to be a good financial decision for them. Eventually, they decided the franchise was not the right opportunity for them at that time.
There are many things to consider when purchasing a franchise, and here is a quick list of things to consider if you are thinking about buying a franchise of your own. This list is only designed to help you decide if you should pursue the opportunity further, and is by no means a comprehensive “how to own and run a profitable franchise” list.
5 Things to consider before buying a franchise
The franchise: There are many types of franchises available for sale – restaurants, bars, auto repair shops, convenience stores, tax preparation, and many other stores that provide goods or other services. When deciding which franchise you want to buy into you should consider these important things:
- Name recognition: How well known is the company you wish to buy into? Is it a national, regional, or local company? Are you trying to expand a regional franchise into an area where it is not very familiar?
- Demand: Is this service needed in your area? Can your area support another restaurant, service station, etc.?
- Competition: If you want to open a new McDonald’s franchise, are there similar franchises such as Wendy’s, Burger King, or Hardee’s nearby?
- Growth: Has this company been experiencing growth? This will not guarantee your success, but it is a good idea to understand how this particular business has been growing in similar areas.
- Training/Support: How much help will you get from your parent company? Training and other support goes a long way in helping your franchise be a success.
The cost: There are many costs associated with owning a franchise. If you don’t have a good idea of what your expenses will be, you are doomed to fail even before you begin.
- Franchise costs: Typical franchise start up fees can run from a few thousand dollars to several hundred thousand dollars, depending on the company you are buying into. Often times these fees only include the right to use the name and sell the product or services under that name. Other costs such as the building and equipment are separate.
- Ongoing fees: Many franchises require franchisees to pay a certain amount of money or a percentage of sales every year to continue using the brand name. Royalties can be a hidden cost that many people do not consider. Some of these costs are used for national and local advertising, and other portions of the fees are absorbed into the corporate coffers.
- Real estate/utilities: Rent or mortgage is an ongoing cost, and can be the largest recurring payment a franchise owner will face. Utilities are another large expense and can run into the thousands of dollars per month depending on the type of franchise.
- Equipment/inventory: Few businesses can get by without owning equipment, tools, computers, and an inventory of goods to sell. Similar to franchise fees, equipment and inventory start-up costs can run from several thousand to several hundred thousand dollars depending on your company’s needs.
- Payroll: Unless you are the sole worker for your franchise, you will have to pay your employees’ salary and benefits package.
Location: This is one of the most important aspects of any business as a great location can make or break a company.
- Site Approval: Some franchises actually approve every site considered for a franchise. This is important if you already own your prospective building or have a site in mind. There are also non-compete restrictions preventing franchises from competing with the same franchise within certain proximity to each other. (e.g. McDonald’s will not allow another McDonald’s to within a certain distance of another McDonald’s to prevent them from “stealing” each other’s business. So far as I can tell, Starbuck’s has no such restriction. I have seen a Starbucks on 3 corners of an intersection!)
- Design: Many companies require their franchises to maintain a certain appearance or other set of standards. This can include things such as exterior building design, interior design, fixtures, etc.
- Built-in clientele: Is the location near a university or a large business? How about near a major intersection or highway? Having a large group of people who can easily patronize your business is a great benefit, and will be helpful in your company’s success.
Control: When you buy into the franchise, how much control will you have?
- Company standards: Your franchise may be required to conform to certain company requirements such as hours of operation, uniform standards, products/services offered, advertisements, and more.
- Company supplied products: Some franchises require the franchise owner to purchase products and goods from the parent corporation. Have you ever gone into McDonald’s and noticed the Ketchup packets they use? They all have the McDonald’s logo on the packet. The Franchise owner can’t go to Costco to pick up bulk ketchup packets. He has to buy them directly from McDonald’s – at the corporate price.
You: This is the most important element of them all. Do you have what it takes to own your own business?
- Skills, abilities, and interests: Do you have any experience in this particular industry? Do you plan on running the business yourself, or hiring a manager or group of people to run operations? Are you interested in this industry, and will you enjoy what you are doing? Understanding your own abilities will go a long way toward helping you know if you will be capable of running your own business.
- Goals: Where do you plan on taking this franchise? Do you require a certain annual income? How many hours do you wish to work? How long do you plan on owning and running this operation, and do you have plans to expand beyond one franchise? A clear set of goals will help you understand what you need to do to be successful, and help you develop a plan of action to get there.
- Investment: How much can you invest in a franchise, and, if things go badly, how much can you afford to lose? Do you have a sufficient credit rating to secure the proper loans? Can you afford to forgo income during the first year or two, when business may be slow and expenses may be high?
- Adaptation: How well can you adjust to difficult situations? The survival of your business may depend on your ability to deal with a similar franchise moving in nearby, economic changes in your community, increases in the costs of labor or inventory, etc.
As mentioned earlier, this is by no means an exhaustive list of everything one needs to do before buying a franchise. This list should just help you determine whether or not a franchise might be the right opportunity for you. Before buying a franchise, you should investigate as much about the particular company and industry as you possibly can. In addition, you should hire an accountant and lawyer to help you understand your projected costs and legal obligations. *In addition, a lawyer can help you understand the Uniform Franchise Offering Circular (UFOC), which details important legal and financial information regarding the particular franchise.*
There are many other things to consider as well. The Federal Trade Commission has set up a Consumer Guide to Buying a Franchise, which served as a basis and resource for some of this information. If you plan on buying a franchise, do your research, then make an informed decision. Good luck!